We Told You an Out of Turn Rate Hike is Coming!
We, at TruBoard Partners, had classified RBI’s monetary policy stance, post the April 22 meeting as a step towards neutrality, from accommodation. Though back then, the Monetary Policy Committee had unanimously voted to keep policy rates unchanged, RBI activated the Standing Deposit Facility, which effectively raised reverse repo by 40 bps, without explicitly saying so.
We had also stated that it will not be surprising if RBI raised policy rates out of turn (prior to the scheduled June’22 meeting). Read: http://blogs.truboardpartners.com/retail-inflation-render-indians-poorer/
Well, this indeed has materialised, with the RBI, in a surprising (well, not so) move, raised repo rate by 40 bps to 4.4%, on 4th May! This automatically raises the standing deposit facility to 4.15% (from 3.75% decided in Apr) and the marginal standing facility rate and the Bank Rate to 4.65%. Also, the cash reserve ratio (CRR)will be higher by 50 bps from 21st may, effectively mopping out Rs 87,000 crores of excess liquidity lying with banks.
This move takes RBI closer to its global peers in USA, UK, New Zealand, Korea, Singapore etc, in monetary policy tightening. Catching up the curve will augur well for both Indian debt and currency markets. While debt market will have a better visibility of the runway, rising spread between Indian rates and those in developed markets will support currency. Both eventually assisting in reigning in inflation to some extent. The yield on the benchmark 10 Year Indian Government Security paper rose sharply to 7.38% after this announcement, from 7.12% earlier. USDINR also is inching lower than its previous close of 76.48.
Inflation remains the biggest threat faced by the Indian economy. Food inflation is particularly worrying with factors like heat-waves impacting the Rabi harvest in April and May inflating domestic food prices and reduced crop acreage in Ukraine adding to the surge in global food prices in coming months. While global factors are difficult to control, Indian fiscal policies should gear up (in sync with monetary policies) to meet the domestic challenges and ring fence the nascent economic recovery.
TruQuest is knowledge series launched by TruBoard Partners providing succinct updates and views on:
- Liquidity outlook
- India’s macro economic view
- Trends within the infrastructure, Real Estate and Renewable Energy sectors
- Impact analysis of new regulations and policies on lending and capital flow
Author:
Debopam Chaudhuri, Head of Research and Ratings
+91-9819239926, dc@truboardpartners.com
Author:
Debopam Chaudhuri
Head of Research and Ratings
+91-9819239926
dc@truboardpartners.com
Disclaimer
The data and analysis covered in this report of TruQuest has been compiled by TruBoard Pvt Ltd and its associates (TruBoard) based upon information available to the public and sources believed to be reliable. Though utmost care has been taken to ensure its accuracy, no representation or warranty, express or implied is made that it is accurate or complete. TruBoard has reviewed the data, so far as it includes current or historical information which is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Information in certain instances consists of compilations and/or estimates representing TruBoard’s opinion based on statistical procedures, as TruBoard deems appropriate. Sources of information are not always under the control of TruBoard. TruBoard accepts no liability and will not be liable for any loss of damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary) from use of this data, howsoever arising, and including any loss, damage or expense arising from, but not limited to any defect, error, imperfection, fault, mistake or inaccuracy with this document, its content.