DC Edit | Repo rate hike unavoidable

 

 

The Reserve Bank of India announcement today to hike lending rates by 50 basis points (up now to 5.40 per cent), the highest single hike since 2019, is in line with actions of central banks across the world, to tame the rising hungry beast of inflation. This also puts the rate to a level higher than the pre-pandemic mark.

Despite the move, the RBI does not see inflation coming down by too much, or too quickly, and retained the projection for inflation for the remainder of the financial year 2022-23 at 6.70 per cent, another new global norm.

Since May this year, the RBI has undertaken a series of moves on the money supply side to handle inflation, which for the first time since Prime Minister Narendra Modi took charge in 2014, has been growing faster than the government would have liked. This hike to the repo rate, the rate at which the RBI would lend money to commercial banks, is the third in quick succession.

Terming the hike by 50 points as a “new normal”, RBI governor Shaktikanta Das, who did not have too many luxuries or elbow space in scripting this new set of tweaks to the monetary policy, also retained an optimistic annual growth rate at 7.20 per cent.

The RBI is keen to project a no holds-bar war against inflation, and may undertake other moves in coming days to bring it down — a political necessity for any government heading towards the end of its second term.

The RBI also declared that it expects commercial banks to reduce its reliance on the central bank supply of money to support credit offtake, and strengthen its own deposit rates and capability to mop up resources.

The rise in EMIs for middle classes, especially for home and automobile loans, would play out as a dampening factor in rise in sales, and impact growth. All stakeholders would watch carefully on how badly, or how much, inflation control dampens the growth trajectory and private investor mood.