RBI’s Monetary Policy Review 8th June 2022 – Key Takeaways and Highlights

The Monetary Policy Committee (MPC) met on the 6th, 7th & 8th June 2022.  Based on an assessment of the macroeconomic situation and the outlook, the MPC voted unanimously to increase the policy repo rate by 50 basis points to 4.90 per cent, with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 per cent. The MPC also decided unanimously to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Governor Shaktikanta Das announced on Wednesday, in its fight to contain the soaring inflation.

The present rate hike comes after an off-cycle hike last month on 4th May 2022, when the MPC voted unanimously to increase the policy repo rate by 40 basis points to 4.40 per cent and the standing deposit facility (SDF) rate was adjusted to 4.15 per cent; and now the marginal standing facility (MSF) rate and the Bank Rate are increased to 4.65 per cent.

While explaining the MPC’s rationale for its decisions on the policy rate and the stance, the Governor said " The protracted war in Europe and the accompanying sanctions have kept global commodity prices elevated across the board. This is exerting sustained upward pressure on consumer price inflation, well beyond the targets in many economies. The ongoing war is also turning out to be a dampener for global trade and growth. This is reflected in sharp corrections in major equity markets, sizeable swings in sovereign bond yields, US dollar appreciation, capital outflows from EMEs and even from some AEs. The EMEs are also witnessing depreciation of their currencies. Globally, stagflation concerns are growing and are amplifying the volatility in global financial markets. This is feeding back into the real economy and further clouding the outlook. In such a challenging global environment, domestic economic activity is gaining traction, while inflation pressures have intensified further. The MPC noted that inflation is likely to remain above the upper tolerance band of 6 per cent through the first three quarters of 2022-23."

These are the Highlights and Key Takeaways from the MPC's Meeting:

  • The Repo rate has been increased by 50 basis points (bps) to 4.90 per cent to bring down the elevated inflation and tackle the impact of geopolitical tensions. https://twitter.com/ETMarkets/status/1534468762774040576/photo/1

  • The Standing Deposit Facility and Marginal Standing Facility rates raised by 50 basis points. The Standing Deposit Facility rate is now 4.65 percent, and the Marginal Standing Facility rate now 5.15 percent.

  • RBI remains accommodative but is focusing on withdrawal of accommodation: MPC voted unanimously to remain focused on the withdrawal of accommodation to ensure inflation remains within target going forward.

  • GDP growth forecast for FY23 retained at 7.2 percent. GDP growth forecast at 16.2 percent for April-June. GDP growth forecast at 6.2 percent for July-September. GDP growth forecast at 4.1 percent for October-December. GDP growth forecast at 4.0 percent for January-March 2023.

  • 75% of inflation projections attributed to food inflation. CPI inflation forecast for FY23 raised to 6.7 percent from 5.7 percent. RBI Inflation forecast assumes normal monsoon and crude basket price at $105/barrel

  • Endeavour is to move towards 4% inflation target, RBI not bound by convention, future course will depend on evolving inflation-growth dynamics says Governor Shaktikanta Das.

  • While normalising pandemic-related measures, RBI will ensure adequate liquidity in the banking system.

  • RBI monitoring government securities market very closely. We will take necessary steps as and when required.

  • As on June 3, India's foreign exchange reserves stood at $601.1 billion.

  • Additional measures for co-operative banks

    (a) Limit for individual housing loans by UCBs and Rural Co-op Banks revised upwards by over 100% taking into account increase of house prices

    (b) Proposed to permit rural co-op banks to extend finance to commercial real estate (residential housing projects) within existing limit of 5% of their total assets

    (c) To permit UCBs to extend doorstep banking services to their customers

  • Limit on recurring e-payments now raised: The limit on recurring e-payments is now raised to Rs 15,000 from Rs 5,000 to further facilitate transactions such as subscriptions.

  • RBI allows linking of UPI with credit cards and RuPay customers will benefit first.

  • Digital rupee will be introduced in this fiscal year, RBI will wait for government paper on cryptocurrencies.

  • Review of PIDF : The RBI launched the Payments Infrastructure Development Fund (PIDF) Scheme in January 2021 to encourage the development of payment acceptance infrastructure. As of the end of April 2022, the Scheme deployed about 1.18 crore new touch points. It is now suggested to make changes to the PIDF Scheme, including increasing the subsidy amount and streamlining the subsidy claim process, among other things.

  • Global economy struggling

    The global economy has been grappling with multi-decadal high inflation and sluggish growth, ongoing geopolitical tensions and sanctions, rising crude oil and other commodity prices, and lingering COVID-19-related supply chain bottlenecks, according to the RBI.

  • Indian economy recovering

    The available data for April-May 2022 indicates a broadening of India's economic recovery, according to RBI Governor Shaktikanta Das. Demand in cities is steadily improving, while demand in rural areas is gradually improving. Merchandise exports posted robust double-digit growth for the fifteenth month in a row during May while non-oil non-gold imports continued to expand at a healthy pace, pointing to recovery of domestic demand.

  • The next meeting of the MPC is scheduled during August 2-4, 2022.

Please click on the following link to read: Governor’s Statement - June 2022Governor’s Statement - May 4, 2022.

Please click on the following link to read: Monetary Policy Statement, 2022-23 Resolution of the Monetary Policy Committee (MPC) June 6-8, 2022

Views on RBI Policy rate hike:

Withdrawal of accommodative stance disappointing: PHDCCI

"Hard lending from an accommodative policy stance is disappointing as it will have an impact on costs of doing business and production possibilities. Though RBI’s decision to raise the repo rate by 50 bps to 4.9% is in synchrony with its efforts to tackle persistently heightened inflation, however it will impact India’s economic growth due to dampened demand scenario and discouraged consumer and business sentiments. Any increase in the interest rate increases the costs of doing business, which are already high vis-a-vis high raw material costs amid geo-political distress," said Pradeep Multani, President, PHD Chamber.

“With CPI forecasts at 6.7% from 5.7%, RBIs rate hike of 50bps came in line with market expectations and was taken into account by the market in the previous trading sessions. In an attempt to curb inflation, the expectations of this rate hike had been factored in the form of increase in bond yields, which might result in expensive borrowing for corporates. However, a consequent correction expected in raw material prices as a result of this announcement might provide a stable long term growth plan for the overall economy," said Shivam Bajaj, Founder & CEO at Avener Capital

Not an easy job for RBI: Indranil Pan

“Not an easy job for the central banker. Recently released GDP data showed a sliding y-o-y growth for private consumption expenditure, an indication that economic activity remains slow. On the other hand, the inflation surprise has brought to the fore the need for the RBI to tighten monetary policy. The government has also joined the RBI in an attempt to contain inflationary pressures in the economy. We see the RBI extending its 40bps repo hike of May with a 35bps increase in June, followed by 25bps each in August and September," said Indranil Pan, chief economist at Yes Bank.

Rate hike in-line with expectations

“The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation. The RBI’s decision of hiking repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We also expect another 50 bps hike in CRR to 5% by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels," said Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities.

Paving the way for a series of rate hikes

“Post the off-cycle announcement of a rate hike in May’22, paving the way for a series of rate hikes in the following meetings, the RBI increased the repo rate by 50bps. The MPC has decided to focus on calibrated withdrawal of accommodation while supporting growth. We believe the market had already discounted a rate hike of 40-50bps, and the key monitorable was a commentary on inflation. We may witness another rate hike, probably of a similar quantum, in the next monetary policy to manage inflationary pressures," said Naveen Kulkarni, Chief Investment Officer, Axis Securities.

If higher interest rates don't hurt growth, how will it help bring down inflation?

“Interestingly, while the RBI increases its FY23 inflation forecast to 6.7%, GDP growth projection is kept unchanged at 7.2%. We wonder that if higher interest rates don't hurt growth, how will it help bring down inflation? It also suggests that most of the excess inflation is due to global/supply-side factors. Since the RBI continues to forecast strong growth, it is very likely that it delivers another 25bps hike on 4th of August before it takes a pause. Our fear is that growth could see a serious deceleration in H2FY23 and FY24 on the back of such steep tightening and structural constraints," said Nikhil Gupta, Chief Economist, Motilal Oswal.

Rate hike impact on real estate

“We welcome the step of the apex body to increase the overall repo rates by another 50 basis points. This will help in clamping down inflation and smoothen economic growth. A rise in inflation can soften the stance on an otherwise robust real estate industry. Already raw material prices are increasing and an unbridled rate of inflation will further drive the input costs northwards, therefore resulting in cost overruns for the developer fraternity. In such a case they will have no option but to pass on the price to the homebuyers. Meanwhile, the government should also take concentrated efforts to reduce the spike in prices of raw materials such as cement, bricks, steel, etc. This will also give some relief to the sector," said Suren Goyal, Partner, RPS Group.

“For a few months, the inflation rate has been above 6%, which is beyond the RBI’s safe zone. If not controlled, the inflationary pressure could destabilize an otherwise bullish Indian economy. Although the recent step will increase the home loan rates, an unstable economy is not conducive to the overall health of the real estate industry. For the industry to operate optimally, it is important that the economy continues to grow in a stable, inclusive, and steady fashion," said Atul Goel, MD, Goel Ganga Group.

“The RBI has navigated a delicate situation of rising inflation, slowing growth and reducing liquidity among global uncertainties caused by Ukraine situation. 50 bps Repo rate hike and withdrawal of accommodation is continuity of policy and as per market expectations. The RBI will require all its skills and a little bit of luck to control inflationary expectations and support growth in the days to come," said Nilesh Shah, Group President & MD, Kotak Mahindra Asset Management Company.

“While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9 per cent remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield. We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies. However, the up march in the yields will now be somewhat shallower than our earlier expectations”, said

“While further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9 per cent remaining below the pre-pandemic level, the comment on the orderly completion of the government borrowing programme has served to cool the 10-year G-sec yield. We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies. However, the up march in the yields will now be somewhat shallower than our earlier expectations”, said Aditi Nayar, chief economist, ICRA.

“Today’s hike of 50bps on top of an inter-meeting 40bps hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve. The RBI’s upward revision of the inflation forecast for FY23 to 6.7 per cent from 5.7 per cent in April, was also in line with our expectations, but still lower than our forecast of 7.2% per cent. So, we believe that we are still far from the finishing line and that more frontloaded rate hikes are on the offing”, said Aurodeep Nandi, India economist and vice president at Nomura.

Home loan interest rates which had bottomed out around 6.50 percent in April will now be inching towards 7.60 percent in June. The back-to-back repo rate hikes will make floating-rate loans longer. For example, if a person had borrowed at 7.00% for 20 years and if their rate increased to 7.50%, they would need to be 24 more EMIs. If they had opted for an EMI adjustment, their per lakh EMI would increase by 30 rupees in the above example. In essence, their monthly outgo would increase by about 4%. The math is different for each borrower. The key is to pay off the loan in the intended timeframe. Borrowers may use pre-payment methods such as EMI step-ups or lump-sum payments to control their interest burden. — Adhil Shetty, CEO, BankBazaar.com.

Clearly, markets went into this policy expecting 50 basis points so that has played out. No CRR hike has been a big positive in terms of the sentiment for the short end. So I suppose this combination has helped markets recover some of the selloff we saw in the previous two days. So effectively at 7.44 for the 10-year benchmark, we are sort of somewhat very close to where we ended last week, said Amandeep Chopra, Group President, Head of Fixed Income at UTI MF.

Rate hike will push up home loan interest rates, but they will remain lower than in 2008: ANAROCK

A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales. The RBI is tasked with controlling the spiralling inflation but must simultaneously be careful not to hurt demand recovery. The rate hike will push up home loan interest rates, but they will remain lower than during the global financial crisis of 2008, when they went as high as 12 percent and above. The current hike will reflect more in the affordable and mid-realty segments. The silver lining is that the Indian housing market is still largely end-user driven, so there is no investor mindset seeking the lowest possible entry point, said Anuj Puri, chairman of ANAROCK.

  • V K Vijayakumar, Chief Investment Strategist at Geojit Financial Servicessaid, “RBI’s projections of GDP growth rate of 7.2% and inflation of 6.7% for FY23 reflect a realistic monetary policy. The higher inflation projection indicates that the central bank recognises the seriousness of inflation and the 50 bp repo rate hike is a message that they are determined to anchor inflation expectations. The Governor’s remark that ” the economy remains resilient and recovery has gathered momentum” is bullish from the market perspective. The bond market’s positive response with bond yields rising stems from the absence of CRR hike”
  • Ramani Sastri, Chairman and MD at Sterling Developerssaid, “We have observed a robust comeback in residential sales and launches in the last couple of quarters. From a real estate perspective, this hike in the policy rate comes as a hurdle as home loan rates will increase, putting a dent on the homebuyer’s sentiments. Any increase in the interest rate will further impact the costs of doing business and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic. However there has been a fundamental change in buyers expectations and attitude towards homeownership and this will largely withstand marginal fluctuations in lending rates. It also goes without saying that the real estate industry’s perennial hope is fixed on lower interest rates as it improves affordability. There is still pent-up demand and even after the repo rate hike, affordability is still high and the home buyer needs to take advantage of that in the short term.”
  • Lincoln Bennet Rodrigues, Chairman and Founder at The Bennet and Bernard Companysaid, “The current round of hikes could make the buyers apprehensive and they might as well adopt a wait and watch attitude. But on a positive note, the continued wage and job growth in varied sectors will provide a cushion in the short term for the purchasing decisions. The all-time low home loan interest regime in the recent past had boosted the housing demand and also enabled a robust recovery in the real estate sector post the pandemic. Today, people feel the inherent need to make progressive lifestyle changes to lead a more balanced and healthy life. We are hopeful that an improved homebuyer attitude and preference for owning a house will support the housing market and we expect that consumer demand will remain buoyant in the near term. The rate hike won’t have significant impact as home loan interest rates have already gone down substantially in the recent past and buying decisions may not be altered by these marginal changes.”

Source: rbi.org.in, Livemint, Indian Express, Money Control, CNBC18, Business Line, Business Standard

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