RBI Hikes Interest Rate by 50 bps to Pre-Pandemic Level to Cool ‘Stubborn Inflation’

Mumbai:  The Reserve Bank on Friday raised the key interest rate by 50 basis points, the third straight increase since May in an effort to cool stubbornly high inflation and defend the rupee.

The repurchase rate was raised by 50 basis points to lift the interest rate to the pre-pandemic level. The 5.40% repo rate was last seen in August 2019.

Repo is the key rate at which the RBI lends short-term money to banks. One basis points is equivalent to one-hundredth of a percentage point.

Announcing the rate hike, RBI Governor Shaktikanta Das did not offer any indication of a change in the stance or a possible pause in the next policy due in late September.

The Reserve Bank of India's six-member rate-setting panel voted unanimously on the rate hike decision while sticking to its resolve to withdraw the accommodative stance.

It, however, retained GDP growth projection at 7.2% for the current fiscal ending March 31, 2023, and kept the inflation outlook for the year unchanged at 6.7%.

"Inflationary pressures are broad-based and core inflation remains elevated. Inflation is projected to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23, entailing the risk of destablishing inflation expectations and triggering second-round effects," he said.

The RBI targets inflation at 2-6%.

June was the sixth consecutive month when headline CPI inflation remained at or above the upper tolerance level of 6%.

Stating that there has been some let-up in global commodity prices, particularly in prices of industrial metals, and some softening in global food prices, the governor said domestic edible oil prices are expected to soften further on the back of improving supplies from key producing countries.

Further, the advance of the southwest monsoon is by and large on track and kharif sowing has picked up in the recent weeks.

"The shortfall in kharif sowing of paddy, however, needs to be watched closely, although buffer stocks are quite large. Household inflation expectations have eased but they still remain elevated," he said.

The central bank surprised markets with a 40 bps hike at an unscheduled meeting in May, followed by a 50 bps increase in June, but prices have shown little sign of cooling off yet.

The latest increase mirrors the US Federal Reserve-led global tightening of interest rates to rein in spiralling prices, caused by supply snarls and energy price shocks following Russia's invasion of Ukraine.

On the rupee depreciating against the US dollar, he said at a 4.7% decline, the rupee fared much better than several reserve currencies as well as many of its EME and Asian peers.

"The depreciation of the Indian rupee is more on account of the appreciation of the US dollar rather than weakness in macroeconomic fundamentals of the Indian economy. Market interventions by the RBI have helped in containing volatility and ensuring the orderly movement of the rupee," he said.

He said the RBI will remain watchful and maintain the stability of the rupee.

Repo is the key rate at which the RBI lends short-term money to banks. One basis points is equivalent to one-hundredth of a percentage point.

Realtors expect short-term impact on housing sales

Housing sales are likely to be hit, especially in affordable and mid-income categories, following the RBI's decision to hike repo rate, according to real estate developers and consultants.

However, the impact of RBI's decision to raise the benchmark lending rate by 50 basis points to 5.40% is expected to be for a short term, they added.

In all, the RBI has raised benchmark lending rate by 1.40 percentage points since May this year.

"A hike by 50 basis points is definitely on the higher side, and home loan lending rates will now edge further into the red zone," real estate consultant Anarock Chairman Anuj Puri said.

This finally marks the end of the all-time best low-interest rates regime, one of the major factors that drove housing sales across the country since the pandemic, he added.

"This whammy comes along with the inflationary trends of primary raw materials, including cement, steel, labour, etc., that have recently led to a rise in property prices. Together, these factors - rising home loan rates and construction costs - will impact residential sales that did reasonably well in the first half of 2022," Puri said.

Colliers India CEO Ramesh Nair said several banks have already begun hiking home loan rates and this trend is expected to continue.

"...the higher home loan rates could dent homebuyers’ sentiments, especially in the affordable to mid category. However, we do not see a significant impact on the high-end and luxury segments due to the higher home loan rates," he said.

 Knight Frank India CMD Shishir Baijal said the third subsequent rate increase will mean a deterioration of affordability and may impact the sentiments of homebuyers.

"With the cumulative rate hike until today, assuming complete transmission, a prospective homebuyers’ affordability shrinks by around 11 per cent i.e. from an ability of purchasing a house of Rs 1 crore value shrinking to Rs 89 lakh now," he said.

 Samantak Das, Head of Research and Chief Economist, JLL India, said the likely transmission of another 30-40 basis points increase in home loan rates might cause some mid-cycle slowdown for the residential sector.

"This could see some short-term disruption to the sales growth momentum. It is however a note of caution and not a reflection of the overall residential sector’s health, with the medium to long-term growth prospects remaining intact," he said.