RBI Hikes Repo Rate By 50 BPS To 4.9% From 4.4%

Reserve Bank of India (RBI) hiked its key interest rate by 50 basis points (bps) on Wednesday (June 8, 2022) to 4.9 per cent from 4.4 per cent in an effort to tame inflation that has remained stubbornly above the central bank’s tolerance limit for the past several months.

The six-member Monetary Policy Committee (MPC) led by Governor Das unanimously decided to raise the key interest rate in view of the inflationary pressures and higher supply shocks. The MPC, which met between June 6-8, decided to keep its policy stance of 'withdrawal of accommodation’.

On the inflation front, the RBI revised its projection for FY23 to 6.7 % from 5.7% earlier. “Our steps will be calibrated, focussed on bringing down inflation to target level," Das said while announcing the policy outcome.

"Inflation has steeply increased beyond the upper tolerance level," he stated, adding that "upside risks to inflation as highlighted in last policy meetings have materialised earlier than expected."

The MPC, however, retained the real GDP projection for FY2022-23 at 7.2 per cent. GDP growth for Q1 is expected at 16.2%, for Q2 at 6.2%, Q3 at 4.1% and Q4 at 4%, Das added.

"Looking ahead, real GDP is expected to broadly evolve on the lines of the April 2022 MPC resolution. The forecast of normal south-west monsoon should boost kharif sowing and agricultural output," the RBI governor noted.

"This will support rural consumption. The rebound in contact-intensive services is expected to sustain urban consumption," he said.

Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates have been hiked by 50 bps. The SDF rate stands adjusted to 4.65%, whereas, the MSF rate is adjusted to 5.15%.

Talking about liquidity, Das further said that the central bank will ensure the availability of adequate liquidity to meet the productive requirements of the economy. 

"Going ahead, while normalising the pandemic related extraordinary liquidity accommodation over a multi-year time frame, the RBI will ensure availability of adequate liquidity to meet the productive requirements of the economy," he stated. 

In a recent interview, the RBI governor had stated that the expectation of rate hikes in June is a “no brainer”.

In the off-cycle decision, the central bank had raised the repo rate by 40 bps and the cash reserve ratio (CRR) by 50 bps in May.

Industry reactions

The repo rate hike by the RBI on Wednesday was on the expected lines as the industry expected the increase in the central bank's benchmark rate.

Here's how the industry reacted to RBI's repo rate hike:

“The outcome of the MPC meet was in line with most of our expectations except that the repo rate hike came in at 50 bps vs 40 bps expected by us," Dhiraj Relli, MD & CEO, HDFC Securities.

“The outcome of the third monetary committee (MPC) policy of FY2023 was on expected lines, unlike the off cycle surprise rate hike on May 4th 2022. The MPC unanimously agreed to hike the repo rate by 50bps to 4.90% and continuing with stance of “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth," Avnish Jain – Head Fixed Income, Canara Robeco Asset Management Company Limited.

“As anticipated, with inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the RBI has decided to increase the repo rates by 50 bps. It is now increased to 4.90%. A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales. Considering that inflation continues above its target zone of 6%, a hike was inevitable, and it will doubtlessly have some repercussions on housing uptake," Anuj Puri, Chairman – ANAROCK.

“We have observed a robust comeback in residential sales and launches in the last couple of quarters. From a real estate perspective, this hike in the policy rate comes as a hurdle as home loan rates will increase, putting a dent on the homebuyer's sentiments. Any increase in the interest rate will further impact the costs of doing business and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic," Ramani Sastri - Chairman & MD, Sterling Developers Pvt. Ltd.