As expected, the Reserve Bank of India (RBI) governor Shaktikanta Das on 7 December announced a 35 basis point (bp) hike in the repo rate or key lending rate at which the central bank lends short-term funds to banks. One bp is one hundredth of a percentage point.
First the obvious question: Why did the RBI hike rates today yet again after 190 bp cumulative hike since May? The reason is that the inflation beast hasn't been tamed yet. The RBI is under immense pressure to bring the inflation back to the target level. It needed to act tough.
Throughout his speech, Das iterated the RBI’s focus and sense of urgency on inflation fight. “We will keep an Arjuna’s eye on inflation,” Das asserted, adding the course of policy will be dependent on future data. The message is very clear. We will see another round of rate hike in February of 25-35 bps.
Remember, this is the first ever MPC review after the country’s central bank officially admitted failure in fulfilling its primary responsibility-- keeping the inflation in 2-6% band. The RBI was subsequently forced to write a formal explanation to government on reasons of failure and future course ahead.
The pressure to tame the inflation has gotten bigger since then.
To give a context, the rate setting panel, MPC, has so far been on an aggressive rate hike spree this year. It started in May this year with 40 bps and followed up with three tranches of 50 bps each. Such back-to-back rate hikes were warranted because of the threat from a persistently high inflation.
While a rate hike was given today, the only question was whether the MPC will surprise beyond an expected 35 bps. With 35 bp hike happening now, the remaining tranche of rate hike can happen early this year, possibly in February.
The RBI has conveyed this move with the continuation of stance. In fact, more than the rate hike itself, the bigger takeaway from the policy today is the continuation of stance on ‘withdrawal of accommodation’. There was an expectation that the stance will be changed to ‘neutral’ but this didn’t happen today.
The RBI thinks there is no immediate concern on growth front, warranting monetary policy support. The growth target was revised downwards to 6.8% but even there Das stressed that even the lowered growth target for the current year will be among the fastest growing major economies in the world, implying that there is no pressing need for the central bank to pause rate hikes now at this point.
Inflation remains the major headache of the panel.
To sum up, while another rate hike is given, the MPC has clearly entered the final lap of the rate hike cycle that began back in May this year. Most probably, the February policy will be the last of MPC’s rate hikes in this cycle post which there will be a long pause.
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