In a surprise move, Reserve Bank of India (RBI) has hiked repo rate by 40 basis points (bps), the first such hike in almost four years, accompanied with an increase in CRR by 50 bps to align with the current market realities, but it came as a double whammy for the markets that crashed. The bloodbath in equities continued even today.
The market was definitely expecting a rate hike by RBI, but in a slower pace. The surprise announcement is a departure from the usual practice of taking a call on rates periodically in the meetings of Monetary Policy Committee (MPC). But the urgency underlines the extraordinary situation we are in now.
There has been a concrete evidence that prices have been on the upswing. The consumer price index (CPI) has crossed the 7% mark. The jump in fertiliser prices and other input costs have direct impact on food prices. Prices of imported cooking oils like palm oil have also gone up considerably. The price of oil in the wake of Russia-Ukraine war remains at over 105 dollars per barrel in the international markets.
Inflation is expected to rule at the elevated levels for which proactive calibrated steps were required to be taken to tackle it. RBI has, therefore, responded to market forces prudently and well in time.
The rate hike is also beneficial for the banking sector, as the risk will get repriced properly. Banks had already started tweaking their rates upwardly by 5 or 10 bps to align with the market forces.
This rate hike doesn’t, however, appear to be one-off. A series of rate hikes may be in the offing. Interestingly, RBI’s rate hike preceded the US Federal Reserve’s decision to hike the policy rate by 50 bps, the biggest since 2000. The fear of recession and stagflation led to a massive drop in the US markets also last night. Major central banks have already gone on a rate hike spree, as inflationary pressures are not transitory in nature.
A rate hike at this juncture by RBI would help preserve macro-financial stability amidst increasing volatility in financial markets. The action of RBI should, therefore, be seen as a growth positive aimed at containing inflation and supporting growth.
This sort of agility in the economy is needed to make it capable of weathering any challenges in the present geopolitical conditions.