EMIs for home, auto and other loans will rise after the Reserve Bank of India (RBI) raised the key interest rate by 50 basis points on Wednesday, the second hike in five weeks, to rein in a continuing rise in prices to hurt consumers in the short term.
The increase in the lending or repurchase (repo) rate by 50 basis points – the largest in more than a decade – to 4.90% follows a 40 basis point hike last month during of an unscheduled meeting that kicked off the crunch cycle.
At the same time, the dovish pandemic-era stance has been abandoned, meaning that further hikes could be considered to rein in inflation, which since the start of the year has been above the tolerance limit. top of the central bank.
“Inflation has risen sharply well beyond the upper tolerance level (of 6%),” RBI Governor Shaktikanta Das said when announcing the fortnightly monetary policy. “Upside risks to inflation, as highlighted in recent policy meetings, have materialized sooner than expected.” maintenance of prices above the tolerance margin of 2 to 6% during the first three quarters (until the end of December).
The law stipulates that the central bank will have to explain in writing to the government the reasons why inflation has not been kept within the target range if prices were to remain above 6% for three consecutive quarters. It must also propose corrective measures to control prices.
To balance inflation-growth dynamics, Das said the RBI would remain focused on withdrawing accommodation as system liquidity continues to remain above pre-pandemic levels. However, the withdrawal of housing will be done in such a way that growth continues to receive adequate support, he added.
“We dropped the word (accommodative) but we remain dovish and that’s mainly to give more clarity to the market,” he said.
The Monetary Policy Committee (MPC), however, maintained its economic growth projection at 7.2%.
While food, energy and commodity prices remain high, this suggests that most of the excess inflation is due to global/supply-side factors. Retail price inflation in April accelerated to 7.79% from a year earlier.
Das said 75% of the 100 basis point rise in inflation forecasts was due to a spike in food prices due to the war in Ukraine.
“The war has led to the globalization of inflation,” he noted.
The May 4 and Wednesday rate hike came after the RBI kept the interest rate at a record 4% for 11 consecutive times.
Das mentioned that even after the hikes, the policy rate is below the pre-pandemic level of 5.15%.
RBI has cut the repo rate by a cumulative 250 basis points since February 2019 to help revive growth momentum. This included a cut of 115 basis points between March 2020 and May 2020 to soften the blow of the COVID-19 crisis.
Meanwhile, Economics Department Secretary Ajay Seth said monetary and fiscal authorities were taking steps to moderate inflation and boost growth.
”There are national challenges and bigger ones are there in the global scenario. Whatever the cost to the monetary and fiscal authorities, these measures are being taken. We (are) (working) to moderate inflation (and) at the same time maintain growth efforts as before,” Seth told reporters.
Suman Chowdhury, Chief Analytical Officer, Acuity Ratings & Research, said: “We believe further rate hikes are likely over the next 2-3 policy meetings as RBI has revised its inflation forecast upwards. overall.” “However, the extent of further increases will depend on inflation over the coming months, the performance of the monsoon and its impact on food prices as well as the effectiveness of government price control measures. .” Dhiraj Relli, MD & CEO, HDFC Securities, said that while a pre-COVID repo rate revision of 5.15% over the next 1-2 meetings is a given, most economists s expect it to go beyond that level.
Other measures announced by the RBI on Wednesday included raising limits on housing loans made by cooperative banks and rural cooperative banks allowed to lend to residential housing projects.
Urban cooperative banks were also allowed to offer door-to-door services to customers.
The electronic money order limit on cards for recurring payments such as subscriptions, insurance premiums and school fees has been raised from Rs 5,000 to Rs 15,000 per transaction.
The RBI has proposed to allow credit card linking to UPI. To begin with, Rupay credit cards will be activated with this feature.
UPI currently facilitates transactions by linking savings/current accounts through users’ debit cards.
(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)