MUMBAI: Home and consumer loans are set to become costlier with the RBI’s Monetary Policy Committee (MPC) on Wednesday raising the key repo rate the rate at which it lends to commercial banks by 50 basis points (bps) to 4.9% to rein in inflation.
It also changed its stance to “withdrawal of accommodation” from “remaining accommodative” to give greater clarity to markets on its future actions. The repo rate hike comes on the heels of a 40 bps off-turn increase last month to 4.4% amid retail price inflation surging to an eight-year high of 7.79% in April.
While raising its inflation forecast to 6.7% for FY23 from 5.7% in April, the RBI kept its growth projection for the year unchanged at 7.2%. Governor Shaktikanta Das said 75% of the increase in the forecast compared to April (5.7%) was attributable to food inflation.
“The main reason for the revision is the war in Europe, apart from secondary factors like tomato price rise and electricity tariffs being raised across states,” he said. Analysts expect the central bank to further increase the repo rate by 60-90 basis points given the fact that it revised the FY23 inflation estimates upwards by 100 basis points.
Attributing the RBI’s retention of 7.2% growth projection to forecast of a normal southwest monsoon, that would support rural consumption, and rebound in contact intensive services, which would boost urban growth, Das pegged Q1 growth at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4%, with risks broadly balanced.
However, negative spillovers from geopolitical tensions, elevated international commodity prices, rising input costs, tightening of global financial conditions and slowdown in world economy continue to weigh on the outlook. “Our rate actions are calibrated to the inflation-growth dynamic. Inflation must come down, inflation expectations must come down and economic recovery must continue,” Das said.
On the rising repo rate transmission not being as effective on the deposit side, relative to banks raising lending rates much more quickly, the governor said it would take two-three months for the rate hikes to be transmitted to the “liability side”, referring to the time that banks would take to raise deposit rates.