A TOUGH ROAD AHEAD

MANAGING INFLATION AND SUSTAINING GROWTH APPEAR TO BE DIFFICULT FOR THE RBI

In line with expectations, the six-member Monetary Policy Committee (MPC) - the interest rate-setting body of the Reserve Bank of India (RBI) - delivered a 50 basis points (bps) hike in the benchmark repurchase rate (repo) in its 30th September policy review.

The repo rate now stands at 5.90%, moving above the pre-pandemic level of 5.15% (in February ’20) and at the highest level since May ’19. The MPC has raised the key interest rate by 190 basis points so far in this financial year in a bid to check higher inflation.

Five of the six MPC members voted to raise the repo rate by 50 bps, while one member voted for a 35 bps rate hike. The central bank has retained the policy stance of ‘focus on withdrawal of accommodation’, reiterating its commitment to inflation control while supporting growth.

The repo rate is the interest rate at which banks borrow from the RBI during times of tight liquidity in exchange for government securities

as collateral. This way liquidity is injected into the system at the repo rate.

The repo rate influences all other interest rates in the system like banks’ lending and borrowing rates. It also influences yields on government and corporate bonds. With the hike in repo rate, where would the current rate hike cycle terminate? Inflation back home and the stance of the US Federal Reserve will have a major say in deciding policy rates in India.

CPI INFLATION - HAS IT PEAKED?