RBI hikes benchmark rate by 50 bps to 5.9% | Latest News India - Hindustan Times
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RBI hikes benchmark rate by 50 bps to 5.9%

Sep 30, 2022 11:39 AM IST

Reserve Bank of India (RBI) governor Shaktikanta Das, who made the announcement, warned of an “extraordinary global geopolitical situation”

As widely expected, India’s central bank on Friday announced a 50-basis point hike in the benchmark repo rate to 5.9%. Reserve Bank of India (RBI) governor Shaktikanta Das, who made the announcement, warned of an “extraordinary global geopolitical situation”.

The RBI projected the GDP growth on an inflation-adjusted basis for the financial year 2022-23 at 7%, lower than 7.2% earlier. (REUTERS)
The RBI projected the GDP growth on an inflation-adjusted basis for the financial year 2022-23 at 7%, lower than 7.2% earlier. (REUTERS)

The RBI projected the country’s GDP growth on an inflation-adjusted basis for the financial year 2022-23 at 7%, lower than 7.2% earlier, Das said after a meeting of the monetary policy committee. GDP growth is seen at 6.3% for the second quarter, 4.6% in the third quarter, and 4.6% in the fourth quarter of 2022-23.

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Inflation is hovering around 7% and the RBI expects it to remain elevated at around 6% in the second half of the financial year, Das added.

Central banks across advanced and emerging economies are increasing rates almost in lockstep to quell inflation amid the Ukraine war, rising energy prices, and lingering supply-chain disruptions.

Central banks typically raise the benchmark repo rate – the interest rate at which commercial banks borrow money by selling their securities to the Reserve Bank – to shrink the money supply in the economy.

From the US to Europe and India, countries are aggressively raising lending rates, which aim to curb the supply of cheap money and thereby help to bring down inflation. But such monetary tightening has costs. It dampens investment, costs jobs, and suppresses growth, a trade-off faced by most nations, including India.

Quoting Mahatma Gandhi, Das said, “We are grateful, ever vigilant, ever striving.” He flagged continuing inflation risks to Asia’s third largest economy. “Global geopolitical situation is weighing heavily on domestic inflation. Acute imported inflation pressure has eased but remained increased in food and fuel prices.”

The RBI first raised rates by 40 basis points at an unscheduled meeting in May, followed by 50 basis points in June and 50 basis points in August. A basis point is one-hundredth of a percentage point.

Das said there were “upside risks” to food prices, and cereal price pressure has spread from wheat to rice, while lower sowing of pulses could also add some pressure. “These risks to food inflation have adverse impacts on inflationary expectation,” he said, warning of so-called “second-order effects”, meaning spill-over impacts.

“India is better placed than many economies, but if high inflation is allowed to remain, it exacerbates second-order effects.”

The overarching focus is on “maintaining macroeconomic stability”, the RBI governor said.

On September 16, the World Bank warned of a likely recession in 2023. “Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” World Bank Group president David Malpass said in a statement.

An unrelenting tightening of monetary policy by the US Fed to control inflation has boosted the value of the dollar and bond yields, scarring other currencies, including the rupee.

A strengthening dollar has eroded the value of the rupee. The RBI has been intervening in the markets to prop up the national currency by selling dollars from India’s forex exchange reserves.

“There has been a 67% decline in reserves due to valuation changes arising from an appreciating dollar and higher bond yields. The market intervention will continue to be judicious,” Das said. He implied that the RBI will take a measured approach to the extent to which it will defend the rupee.

The country’s precious foreign exchange reserves stood at $537.5 billion on Sept 23.

A current account deficit (CAD) in the first quarter of 2.8% of GDP and a trade deficit of 8.1% point to “weakening global growth and consequently trade deficit remained high”, Das said.

CAD refers to the difference between what India spends in the rest of the world and what is earned from the rest of the world.

The RBI governor said services export remained strong, registering a 35.4% growth in the April-June period, while remittances were up 22.6%. This net surplus in services export will partly offset the trade deficit, he said.

Watch: Get set for higher EMIs as RBI hikes repo rate

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