Reserve Bank’s three-day meeting from today: RBI to hike repo rate again this week; decision can be taken on repo and reverse repo rate

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting will commence today, June 6. The Reserve Bank is expected to decide to raise the repo rate by 0.40 percent at this meeting as well. Governor Shaktikanta Das will lead this three-day summit, which would be conducted every two months. On June 8, the meeting will come to a close.

In an off-cycle meeting on May 4, the central bank raised its repo rate — the rate at which it loans to banks — by 40 basis points to 4.4 percent. “More than 45 central banks across advanced economies and emerging markets have raised policy interest rates and/or reduced liquidity so far in 2022…many central banks hiked interest rates in back-to-back policies,” said Soumya Kanti Ghosh, group chief economist at the State Bank of India, in a report. It also stated that a rate hike of 50 basis points is likely. In terms of liquidity, though, the RBI is expected to remain accommodating.

There are several threats to growth and inflation, according to Ghosh. The geopolitical situation, rising oil and commodity costs, increased fuel prices, and rupee depreciation are among them. In addition, the US Federal Reserve announced a significant hike in interest rates, effectively resetting them.

According to Ghosh, if the RBI raises the repo rate by 75 basis points, retail and micro, small, and medium enterprises (MSME) consumers will pay Rs 23,114 crore in interest. Because 39.2 percent of the loans are tied to external benchmarks, this is the case (EBRs). The repo rate is linked to the majority of them. Demand is anticipated to suffer as a result of this. He went on to say that data suggests there is little evidence of savings being interest rate sensitive, as deposits increased even as rates fell. “All of these considerations lead us to suggest that the peak repo rate in this cycle should be anchored at 5.5 percent to get the best result,” Ghosh wrote, “since the impact of big increases in real interest rates on deposits is questionable.”

Repo rate was increased also last month

In May of last month, the Reserve Bank held an emergency meeting and decided to raise the repo rate by 0.40 percent. The RBI raised the repo rate from 4% to 4.40 percent in response to rising inflation. Because of the increase in the repo rate, car loans and housing loans have become more expensive. If the repo rate rises again in this situation, the interest rate on such loans may rise much more.

What is Repo and Reverse Repo Rate?

The repo rate is the interest rate at which the RBI lends to banks. Customers are given loans by banks as a result of this loan. A lower repo rate suggests that a variety of bank loans will be less expensive, but the reverse repo rate is the polar opposite of the repo rate.

The rate at which the RBI pays interest on bank deposits is known as the reverse rate. The reverse repo rate regulates liquidity, or cash, in the markets. A stable repo rate implies that bank loan rates will likewise remain stable.

The RBI’s MPC has a total of 6 members

The RBI’s Monetary Policy Committee (MPC), which sets interest rates, is made up of six members. Three are government representatives, while the remaining three, including the governor, represent the RBI. Only at the MPC’s three-day meeting is a decision on the RBI repo rate and reverse repo rate made.

According to a Bank of America Securities estimate, the RBI would raise its inflation prediction for FY23 from 5.7 percent to roughly 6.5 percent. “In terms of GDP growth, we expect real GDP to rise 7.4% YoY in FY23, somewhat higher than the RBI’s forecast of 7.2 percent.” The RBI MPC (monetary policy committee) is unlikely to revise its growth forecast, according to the article. The repo rate is expected to rise 40 basis points this month, followed by another 35 basis points hike at the next MPC meeting in August, according to BofA.

“The important issue is that the RBI MPC departs ultra-accommodation by August and returns the policy repo rate to 5.15 percent, as it was before the pandemic.” As a result, we expect the RBI MPC to maintain its accommodative attitude until then, while focusing on the removal of accommodation,” according to the research.