RBI MPC Meeting: RBI Hike Repo Rate By Another 0.5% To Tackle Inflation

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RBI rate hike

RBI increased the repo rate as expected by the market. The focus remains on increasing inflation in the country. There are some crucial unexpected updates. Let us look at the details.

Repo and other rate increase 

Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Central bank - the Reserve Bank of India (RBI) to maintain liquidity, in case of a shortage of funds or due to some statutory measures. 

The MPC unanimously decided to raise the rates on the back of inflationary pressures and higher supply shocks. The RBI has hiked the policy repo rate by 50 basis points to 4.90%. Last month, RBI increased the repo rate by 40 bps. In a span of 5 weeks, the repo rate has been increased by 90bps.

This will directly impact the fixed deposit investors as banks will increase fixed deposit rates for them. RBI decides unanimously to keep the policy stance ‘withdrawal of accommodation’.

It has also decided to raise MSF (Marginal Standing Facility) Rate & Bank rate to 5.15% from 4.65%.

Real GDP forecast

The Reserve Bank of India (RBI) has retained the GDP forecast at 7.2%, owing to high inflationary pressures and global supply chain disruptions. The rural demand is likely to improve gradually with an improvement in the agricultural sector and the likelihood of a normal southwest monsoon season. Also, improving capacity utilization and the government's Capex push are likely to support Investment activity. The quarter-wise growth projection stood at:

Inflation projection

RBI Inflation forecast assumes normal monsoon and crude basket price at $105/barrel. The cuts in excise duty on fuels have lowered inflation expectations of households. However, the tense global geopolitical situation and the consequently elevated commodity prices impart considerable uncertainty to the domestic inflation outlook. 

Regulatory measures for cooperative banks

Limits on individual home loans given by urban and rural co-operative banks are being revised upwards by more than 100% taking into account the rise in housing prices over the last decade. Rural co-operative banks can now extend finance to commercial real estate, or loans for residential housing projects, within the limit of 5% of their total assets. The real estate sector stocks are in focus post the announcement.

Credit Card linking with UPI

Currently, UPI transactions are done by linking savings and current accounts through debit cards. Now you will soon be able to do UPI transactions by linking your UPI account with your Rupay Credit Cards.

RBI said that to further deepen the reach and usage of UPI, it has proposed to allow the linking of credit cards to UPI. To start with, Rupay credit cards will be enabled with this facility. The feature later will be rolled out to other providers like Visa and Mastercard.

Other important updates

  • E-mandate on cards for recurring payments, limit upped from Rs 5,000 to Rs 15,000 per transaction.
  • RBI announced several measures to improve credit flow to the real estate sector and boost demand.
  • Surplus liquidity at 5.4 lakh crore lower than 7 lakh crore earlier
  • India's forex reserves stood at $601 billion.
  •  RBI is monitoring G-sec markets very closely and necessary steps will be taken as and when required.
  • Indian Rupee performs much better than EME peers and the Indian banking system remains strong as reflected by key indicators like profitability and provisions.

What to expect in coming MPC meetings?

MPC's next meeting has been scheduled between 2nd and 4th August 2022. Given that inflation is expected to remain above 6% through 3QFY23, RBI will have to be in action. We can expect another 60-85 bps hike for the remainder of FY23 to manage inflationary expectations.