Home, auto and other loans are set to become costlier as the Reserve Bank of India (RBI) raised the benchmark lending rate 50 basis points to 5.90 per cent, the highest since April 2019, to control inflation.
A host of lenders led by State Bank of India, Bank of India (BoI) and mortgage lender HDFC hiked their lending rates by 50 basis points on Friday. SBI raised the external benchmark-based lending rate and repo-linked lending rate (RLLR) by 50 basis points.
The growth forecast has been cut to 7 per cent from 7.2 per cent for the current fiscal but inflation forecast has been retained at 6.7 per cent.
This is the fourth time since May the monetary policy committee (MPC) of the RBI has raised the repo rate, with the total increase at 190 basis points. The repo rate is the rate at which the RBI lends money to commercial banks.
Five of the six members of the interest rate-setting body voted for a 50bps hike, which is in line with market expectations. MPC member Ashima Goyal voted for a 35bps hike.
Five members of the panel voted to remain focused on the “withdrawal of the accommodative policy’’ stance to ensure inflation remains within target, while supporting growth. Inflation in August stood at 7 per cent higher than the RBI’s upper tolerance level of 6 per cent. MPC member Jayanth Varma again voted against this part of the resolution, having advocated a neutral stance.
RBI governor Shaktikanta Das said consumer price inflation remains elevated and above the upper tolerance band of the target because of adverse supply shocks, firming up of domestic demand and spillovers from global financial markets.
The headwinds from extended geopolitical tensions, tightening global financial conditions and possible decline in the external component of aggregate demand can pose downside risks to growth, Das said.
The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments, he said.
“The MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, restrain the broadening of price pressures and pre-empt second-round effects. The MPC feels that this action will support medium-term growth prospects,” the RBI said in its monetary policy statement.
Das said the MPC decisions are governed by domestic conditions and not by the actions of other central banks or the movement of the rupee.
With inflation likely to stay above 6 per cent for September, the RBI for the first time will have to write to the Centre giving the reasons.
According to the medium-term inflation targeting framework, the RBI has to write a letter explaining the reasons for missing the target and charting out details on when it is likely to achieve the target of 4 per cent.
“It is (the letter) a privileged communication between the Reserve Bank and the Government. At this point of time, I cannot say whether it will be made public. From our side, we will not make it public,” Das said.
Das said the RBI is expecting inflation to come down to close to the target of 4 per cent over a two-year cycle.
Economists differ on future policy moves: HDFC Bank said the RBI will raise the repo rate till it reaches 6.5 per cent by the end of the fiscal. Kotak Mahindra Bank said the RBI will hike the repo rate by 35 basis points in the December policy to 6.25 per cent and then pause.
