A Forecast of RBI’s Policy Measures as It Hikes Repo Rate to a Three-Year High

RBI governor Shaktikanta Das explains the MPC decision to hike the repo rate by 50 basis points as withdrawal of accommodation continues to be RBI's stance as the switch to neutral is held off

hikes repo rate

The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) met on Friday, 30 September 2022 to agree on a hike of the repo rate by 50 basis points. The repo rate has now been increased by 190 basis points in less than six months to reach 5.9%, the highest in the last three years. This hike marked the RBI’s systematic withdrawal from an accommodative stance that it had taken since the advent of the pandemic. While this decision was largely expected by the market, the present stance of the central bank remains veiled. And the RBI has done little to unveil it either.

RBI’s Present Stance

The RBI has maintained its stance as “withdrawal of accommodation”. The RBI governor mentioned that in June 2019 the RBI stance was shifted from neutral to accommodative. The inflation rate was lower than the repo rate and there was a liquidity deficit at the time of this shift in stance. With the reverse scenario prevailing presently, the expectation among market watchers was that the RBI would move back to a neutral stance.

Also Read: Personal inflation vs CPI inflation, What’s the difference

Governor Speak 

The observations made by the RBI governor Shaktikanta Das amidst the fresh repo rate hike can be summarised through the following points,

  • The global economic outlook continues to be bleak. The aggressive monetary policy actions have caused negative global repercussions across the interconnected global financial system,
  • Financial conditions are tightening, and recession fears are mounting. The recent rate hikes and possibilities of future hikes have caused extreme volatility and risk aversion,
  • Inflation continues at an alarmingly high level. The hike is made to keep inflation within target levels while supporting growth,
  • Withdrawal of the accommodative stance and aggressive monetary policy action is the third major shock, following the Russia-Ukraine crisis and the pandemic. The aggressive communication by the advanced economy central banks has also contributed to this third storm,
  • Instability is palpable in the equity, bond and currency markets globally. However, India is maintaining macroeconomic stability and resilience, the governor noted, as he pointed out the country’s improved performance parameters.

Also Read: Latest rate hike by RBI will economic momentum shift downwards - click here to know

The governor also mentioned that there has been a 67% decline in reserves during the current financial year due to the appreciating US Dollar and higher US bond yields. He stated that the RBI does not have any exchange rate target at this point. 

On the banking liquidity deficit, the governor hoped that the situation would improve as government spending is poised to start and advance tax’s impact recedes. 

The RBI also plans to propose an expected loss-based approach to the loan loss provisioning by banks, through a discussion paper. Presently, NBFCs follow this model but commercial banks follow the incurred loss model for Non-Performing Asset provisioning.

Expert's Take and the Future Outlook of RBI Monetary Policy

Financial firms have revised their terminal rate assumptions, with Nomura raising it from 6.15% to 6.5%. But in absence of a clear indication from the RBI, there can only be assumptions on what the terminal rate could be. Some experts are predicting a 35 basis points increase in December, followed by a further increase in February, albeit nominal. Experts also predict a quick de-escalation of rates by the end of the next calendar year, to accommodate growth if the inflation rate flattens. All of this, of course, is under the assumption that Fed will stop its hiking spree early next year.

RBI lowered the FY23 growth expectations from 7.2% to 7%. The inflation rate for FY23 is maintained at 6.7%, despite a fall in crude prices. The governor steered clear of any indications about the peak rate, with the market still uncertain about what the terminal rate will be.

RBI is watching the global central bank tightening closely and its repercussions in India. Besides, it is avoiding a neutral stance by defining the stance in terms of real rates rather than nominal rates. Both these factors indicate the possibility of future rate hikes, at least in the next two MPC meetings, before the repo rate falls again.

Also read: How has US fed interest rate hikes affected the Indian economy 

The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) met on Friday, 30 September 2022 to agree on a hike of the repo rate by 50 basis points. The repo rate has now been increased by 190 basis points in less than six months to reach 5.9%, the highest in the last three years. This hike marked the RBI’s systematic withdrawal from an accommodative stance that it had taken since the advent of the pandemic. While this decision was largely expected by the market, the present stance of the central bank remains veiled. And the RBI has done little to unveil it either.

RBI’s Present Stance

The RBI has maintained its stance as “withdrawal of accommodation”. The RBI governor mentioned that in June 2019 the RBI stance was shifted from neutral to accommodative. The inflation rate was lower than the repo rate and there was a liquidity deficit at the time of this shift in stance. With the reverse scenario prevailing presently, the expectation among market watchers was that the RBI would move back to a neutral stance.

Also Read: Personal inflation vs CPI inflation, What’s the difference

Governor Speak 

The observations made by the RBI governor Shaktikanta Das amidst the fresh repo rate hike can be summarised through the following points,

  • The global economic outlook continues to be bleak. The aggressive monetary policy actions have caused negative global repercussions across the interconnected global financial system,
  • Financial conditions are tightening, and recession fears are mounting. The recent rate hikes and possibilities of future hikes have caused extreme volatility and risk aversion,
  • Inflation continues at an alarmingly high level. The hike is made to keep inflation within target levels while supporting growth,
  • Withdrawal of the accommodative stance and aggressive monetary policy action is the third major shock, following the Russia-Ukraine crisis and the pandemic. The aggressive communication by the advanced economy central banks has also contributed to this third storm,
  • Instability is palpable in the equity, bond and currency markets globally. However, India is maintaining macroeconomic stability and resilience, the governor noted, as he pointed out the country’s improved performance parameters.

Also Read: Latest rate hike by RBI will economic momentum shift downwards - click here to know

The governor also mentioned that there has been a 67% decline in reserves during the current financial year due to the appreciating US Dollar and higher US bond yields. He stated that the RBI does not have any exchange rate target at this point. 

On the banking liquidity deficit, the governor hoped that the situation would improve as government spending is poised to start and advance tax’s impact recedes. 

The RBI also plans to propose an expected loss-based approach to the loan loss provisioning by banks, through a discussion paper. Presently, NBFCs follow this model but commercial banks follow the incurred loss model for Non-Performing Asset provisioning.

Expert's Take and the Future Outlook of RBI Monetary Policy

Financial firms have revised their terminal rate assumptions, with Nomura raising it from 6.15% to 6.5%. But in absence of a clear indication from the RBI, there can only be assumptions on what the terminal rate could be. Some experts are predicting a 35 basis points increase in December, followed by a further increase in February, albeit nominal. Experts also predict a quick de-escalation of rates by the end of the next calendar year, to accommodate growth if the inflation rate flattens. All of this, of course, is under the assumption that Fed will stop its hiking spree early next year.

RBI lowered the FY23 growth expectations from 7.2% to 7%. The inflation rate for FY23 is maintained at 6.7%, despite a fall in crude prices. The governor steered clear of any indications about the peak rate, with the market still uncertain about what the terminal rate will be.

RBI is watching the global central bank tightening closely and its repercussions in India. Besides, it is avoiding a neutral stance by defining the stance in terms of real rates rather than nominal rates. Both these factors indicate the possibility of future rate hikes, at least in the next two MPC meetings, before the repo rate falls again.

Also read: How has US fed interest rate hikes affected the Indian economy 

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