BENGALURU, Reuters – On Wednesday, the Reserve Bank of India raised its key interest rate by 50 basis points. This was widely anticipated, and it is now the second increase in as many month. The move was made in an effort to reduce persistently high inflation.

Monetary policy committee (MPC), raised key lending rate (or repo rate) by 50 basis points (bps), to 4.90%.

Marginal Standing Facilit Rate and the Standing Deposit Facility rate were increased by the same amount to 4.65% & 5.15% respectively.

COMMENTARY

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

The central bank remained true to its new strategy of targeting inflation. For sure, multiple challenges are staring at the central bank’s face — sharply higher inflation, rising bond yields, and weak growth prospects. But, the RBI made the right decision to deal with inflation, even though it knew that there are immediate supply-side issues that cannot be solved by monetary policies. Therefore, the RBI must raise rates to stop inflation passing through to prices. This will prevent the potential for high input costs being passed on to consumers. Long-term economic damage from unaddressed inflation would prove to be even more severe. However, RBI projections suggest that inflation will continue to rise at a slow rate and stay well above 6.0% RBI tolerance.

SUVODEEP RAKSHIT SENIOR ECONOMIST KOTAK INSTITUTIONAL EVITIES, MUMBAI

The policy tone remains hawkish. We expect the RBI will continue to hike the repo rate in order to maintain a neutral or marginally positive real rate. In August, we expect a 35 bps rate increase to 5.25% in the repo rate and an additional 5.75% for end-FY2023. In addition to pushing the reporate above its pre-pandemic level a 35bps rise would indicate a gradual normalization of policy actions, while still remaining adequately hawkish. In order to bring liquidity conditions back to the levels of pre-pandemic, we also anticipate a 50 bps rise in CRR from 5% to 5% at the end-of-FY2023.

AURODEEPNANDI, INDIA ECONOMIST and VICE-PRESIDENT, NOMURA (MUMBAI)

“Today’s increase of 50bps, on top of an intermeeting 40bps rise in May, is indicative that inflation has been pushing its way to top of RBI’s priority lists and looking for a catch-up with the curve. We were also pleased with the RBI’s revision to FY23 inflation from 5.7% in March, which was lower than our 7.2% forecast. Therefore, although we think we have reached the end of the road, more forward-loaded rate rises may be in the future.

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

“Including today’s rate hike, the RBI has raised effective policy rate by 155 bps this year through a series of rate hikes and liquidity tightening measures — i.e. Revision of the 4.90% repo rates from 3.35% to 4.90% reverse repo The current tightening cycle will see a peak rate of 6%, given the fact that CPI inflation could average 5%-5% over 12-18 months.

ADITI NAYAR CHIEF ECONOMIST ICRA GURUGRAM

The possibility of further rate rises is clearly there, but the refutation of the 4.9% revised repo rate remains below the pre-pandemic level. However, comments on the completion orderly of the government borrowing program have helped cool the G-sec 10-year yield. In the two following policies, we expect further rate hikes at 35 and 25 bps.