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The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday, 8 June, unanimously voted to increase the benchmark policy rate by 50 basis points (bps), taking the repo rate to a two-year high of 4.90 percent.
Reacting to RBI’s decision, Aditi Nayar, the chief economist at ICRA Limited, said, “We had anticipated that the Monetary Policy Committee (MPC) would raise the repo rate by 40 bps in the June 2022 policy review, in line with the magnitude of the increase seen in May 2022. However, the MPC delivered a slightly more front-loaded rate hike of 50 bps.”
She added that this was “a clear attempt to prevent inflationary expectations from unhinging, in the context of inflation that may be global and supply-side in its origins, but is broad-basing and is massively higher than the upper tolerance of 6 percent,” Business Standard reported.
“This came with the clarification of an average crude oil price assumption of $105/barrel, and the caveat that the latest projection doesn’t take into account monetary policy action. Our CPI inflation forecast is similar at 6.5 percent with an upward bias, amidst a crude oil price range of $100-120/barrel for the Indian basket,” Nayar added.
Describing the monetary policy announcement as aggressive and stating that it moves beyond frontloading interest rate increases, HDFC Bank Chief Economist Abheek Barua said that the central bank seems far more concerned about inflation now, which is well reflected in the upward revision in its inflation forecast by 100 bps to 6.7 percent while remaining relatively more sanguine on growth impulses.
Further, RBI has also decided to increase the existing limits on individual housing loans issued by the cooperative banks.
Reacting to the increase, Dhruv Agarwala, Group CEO, Housing.com, PropTiger.com, and Makaan.com said:
Meanwhile, Madan Sabnavis, the chief economist at Bank of Baroda, was quoted as saying, “The matrix now is clear. Inflation will be higher than expected at 6.7 percent but the growth forecast has been retained at 7.2 percent. Inflation will be at 7.5 percent and 7.4 percent in the first two quarters followed by 6.2 per cent in the third. This means that there will be reasons for further increases in the repo rate and another 50-75 bps looks very much likely under these conditions with an upside to further increases.”
Accordingly, the brokerage expects the policy rate to reach 5.75 percent by December, up from its earlier forecast of 5.15 percent.
As per Bajoria, the RBI may raise the repo rate by 35 bps to 5.25 percent in the next meeting in August, unless there is a dramatic improvement in prices, which looks unlikely.
(With inputs from Business Standard.)
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