RBI raising repo rates is causing a dial down in growth

Markets seemed to have already accounted for the 50 basis point increase in the RBI’s policy rate, declining in three successive sessions ahead of the announcement on Wednesday. RBI Governor Shaktikanta Das confirmed the widely expected increase after the meeting of the Monetary Policy Committee. The decision was unanimous. The new repo rate was fixed at 4.9 per cent. In a surprise decision last month, the RBI had raised the repo rate by 40 basis points, indicating concerns about the inflationary pressures building up in the economy. The prevailing consumer inflation rate continues to be above the RBI’s comfort zone of two to six per cent. There was no change in the cash reserve ratio on Wednesday. Whether the latest hike would help moderate the price line remains to be seen. In fact, economy watchers expect further hikes in the policy rate of 35 and 25 basis points respectively in the next two quarters. Inflationary concerns developing in the economy are set to persist for some more time, according to the RBI.

The central bank further raised the inflation projection to 6.7 per cent from the earlier 5.7 per cent due to the ongoing supply-side problems stemming mainly from the Russian invasion of Ukraine. There was no let-up in the global crude prices which hovered above 120 dollars per barrel of Brent crude earlier this week. Market sentiment reflected the downward trend with the bond yields rising in recent days while share markets registered sharp drops. For the fourth successive session on Wednesday too, both the Sensex and Nifty registered losses. Notably, even after the 50 basis points hike in the repo rate, the bank rate of 4.9 per cent was lower than the pre-Covid levels. But new pressures on the rupee were a cause of concern for the RBI. Despite RBI intervention, the rupee touched a new low of 77.71 to the US dollar on Tuesday. The current account deficit too is running out of RBI’s comfort range of 2-2.5 per cent of GDP due to the huge increase in the price of crude oil.

India imports nearly 80 per cent of its crude oil. Given the pressures on growth, the RBI on Wednesday revised its projection to 7.2 per cent for the current financial year. Interestingly, a day earlier, on Tuesday, the World Bank had scaled down India’s growth for 2022-23 to 7.5 per cent from the earlier eight percent projected in April. Yet, even at the lower growth rate, India will be the fastest-growing economy in the world. Meanwhile, the hike in the policy rate on Wednesday, though widely anticipated, further dampened the sentiment of the real estate sector which is yet to emerge fully from the disruption caused by the pandemic and is reeling under huge losses. The labour-intensive sector is also under pressure due to the rise in the prices of main inputs such as steel, cement, etc. Ordinary consumers will be called upon to tighten their belt further until the global situation eases. The policymakers seem to have little choice in the matter, especially due to the two-year disruption caused by the Covid pandemic.