RBI Hikes Repo Rates By 50 Basis Points, Fixed Deposits To Fetch Higher Interests

The Reserve Bank of India (RBI) today hiked the repo rates by 50 basis points, largely in line with expectations. Repo rates are interest rates charged by the Reserve Bank of India, when lending to banks. The rate setting, Monetary Policy Committee (MPC), which met over the last few days may have considered elevated inflation levels (7% in August) and a weak rupee as major reasons to hike the repo rate by 50 basis points. This is the fourth consecutive rate hike and the third half percentage point increase.

Five of the six MPC members voted in favour of the 50 basis hike in repo rates.

Retail inflation has stayed way above the RBI's tolerance level of 2 to 6%. Globally too, inflation has been surging and central bank's across have been raising rates sharply. The US Federal Reserve too raise Fed rates by 75 basis points recently. While a rate hike by the RBI was almost certain, the quantum of rate hike varied between 35 basis to 50 basis points. However, most analysts had rightly predicted a 50 basis points hike.

Elevated in the near term, but inflation may slide by end-FY23 to 5.3-5.4%

Lower inflation going ahead, may see the near end of tightening measures going ahead, which means there could be just a couple of more interest rate hikes by the RBI or even less. "Even as H1FY23 inflation may turn out to be modest 15bps lower than the RBI's forecast, underlying core inflation still appears sticky around >6% levels. Fall in global commodity prices is a tailwind, but favorable impact is likely to be centered on core goods WPI rather than CPI. Early signs of rising services costs in the economy could be another pressure point. Besides, exchange rate depreciation pass-through (though limited, albeit increasing) could increase additional price pressures ahead, which could partly counter commodity price fall. We maintain FY23 inflation will average close to 6.5% (RBI: 6.7%), while our growth forecast of 7% now has a downward bias, amid global ultra-restrictive policies and impact of front-loaded RBI hikes," Emkay Global said in a report recently.