Today’s RBI Policy was about the global turmoil, falling rupee and of course, inflation! Doing first things first, the MPC voted for an aggressive 50 bps rate hike, effective immediately.
Persistent high inflation and a shift in global policy has led to this hike, while continuing to withdraw the accommodative stance. This is the fourth straight rate hike since May, taking the total rate hike to 190 bps. But the stubborn inflation, like a wild lion trying to be controlled by the ring master, continues to cock a snook, remaining elevated beyond the target ceiling.
But the only silver lining on which the Governor is banking on is the sustained spurt in overall demand in the economy as festivals after Covid for the first time are being celebrated with renewed fervour. Governor said, "Economic activity in India remains stable, and gives us the confidence of dealing with the current problems.”
The market is apparently happy with this policy as the Sensex soared from its lacklustre meandering of earlier. Its just releived that there were no surprises, everythign was on expected lines, the market is celebrating 'certainty' after seeing so much uncertainity.
The message which we get – RBI will move from policy-to-policy and action will be purely on inflation trajectory, data driven- not just domestic but global macro-economic factors too but many are already pencilling in another rate hike.
A quick look at the highlights of the policy:
- The repo rate goes up to 5.9%
- Standing deposit facility (SDF) was adjusted to 5.6%, MSF and Bank rate to 6.15%.
- Inflation for current fiscal retained at 6.7% and at 5% by Q1FY24.
- FY23 GDP growth estimated at 7%; seen at 6.3% in Q2 FY23, 4.6% in Q3 FY23 and 4.6% in Q4 FY23.
- Indian basket of crude stayed at $104/barrel in H1FY23 and assumes it at $100 in H2FY23.
- Q1FY23 current account deficit now stands at 2.8% of GDP and CAD expected at 3.5% for FY23.
- Foreign exchange reserves stand at $537.5 billion
- 28-day VRRR to be merged with 14-day VRRR auction; only 14-day VRRR auction te be conducted.
- Proposes to extend rules applicable on online payment aggregators to offline payment aggregators as well.
Will this now impact demand in the economy? People and industry had been pummelled down over past three years and right now, given the frenzied mode of celebrating every small and big festival, it is unlikely that demand will get impacted; at least not in the short and medium term.
The big question – will banks hike rates of deposits? Like always rates for lending will go up immediately but they will go slow and small when it comes to deposits.
PS: The onus cannot remain only on the RBI to use policy tools to protect the economy and on people like us to keep demand going. Its time the Govt increases spending, only then will collectively we can resolve a lot of macro-economic issues.