InvestorQ : Can you tell me some of the major stand out features of the RBI policy announcement?
Lavanya Subramanian made post

Can you tell me some of the major stand out features of the RBI policy announcement?

Anamika Sodhani answered.
1 month ago

On the last day of the previous month, the RBI announced its monetary policy which hiked the repo rates by 50 basis points, largely along expected lines. In the last 4 months, the RBI has hiked repo rates by 40 bps in May, 50 bps in June, 50 bps in August and now another 50 bps in September 2022. In short, the Reserve Bank of India has hiked by a full 190 basis points in just 4 months. That has aggressively moved the repo rates from a level of 4% to 5.9%. However, this is nowhere close to what the Fed has been doing raising by 75 basis points for 3 Fed meetings in succession. However, terminal rates could go to 6.5% now.

Here are some key takeaways from the policy statement by the Monetary Policy Committee (MPC).

· The repo rates were hiked by 50 basis points for the third policy in succession. While the latest hike took it from 5.40% to 5.90%, the rates have gone up 190 basis point since May 2022 and are a full 75 bps above the pre-COVID levels of 5.15%.

· On unerring signal from the RBI is that the terminal rate, which was originally estimated at 6% may not go to well above 6.5% with most of the hike front ended in 2022 itself. However, this has to be looked at in the context of the rate of inflation.

· The hike in the repo rate also hiked the standing deposit facility (SDF) rate, which is 25 basis points below the repo rate. That now stands at 5.65%. The SDF is what was originally known as the reverse repo rate.

· Just as SDF rate is pegged 25 bps below the repo rate, the bank rate and the marginal standing facility (MSF) rate are pegged 25 bps above the repo rate. That stands hiked to 6.15%, with implications for borrowing costs and hinting at higher EMIs on loans.

· RBI has inflation forecast at 6.7%, despite inflation in August going back up to 7%. RBI is obviously betting on a more robust Kharif and Rabi output this year to temper food inflation, which has been the real cause of rising CPI inflation.

· However, the RBI has lowered the real GDP growth estimate for FY23 from 7.2% to 7.0% and this largely on the back of global macro headwinds, including distinct fears of a global recession; apart from rate hike fears and the rising geopolitical risks.

· The decision to hike rates by 50 bps was unanimous with all the 6 participants assenting to it. However, on withdrawal of accommodation without impacting growth, Jayanth Varma continued to vote against the resolution suggesting that the RBI for now should purely focus on controlling inflation and not digress worrying about growth.