Bankers have welcomed the RBI’s frontload of rate hikes and changed its accommodative stance to firmly control inflation and support the falling rupee.
The Reserve Bank raised key interest rates by 50 basis points to 5.40 percent on Friday, the third rise in a row since May. With the latest increase, the repo rate or the short-term interest rate at which banks lend has crossed the pre-pandemic level of 5.15 percent.
Dinesh Khara, chairman of the country’s largest lender, the State Bank of India (SBI), said the policy reaffirms its commitment to further reduce inflation and ensure financial stability in the markets.
By harmonizing key measures, the RBI has ensured that the economy remains maximally protected from the impact of inflation in everyday life by ensuring broad participation in G-Secs and the forex market.
Abheek Barua, chief economist at HDFC Bank, described the policy actions as “in line with the new global normal”.
The RBI has delivered a textbook policy, one that is fast and aggressive in response to inflation that remains high while growth momentum remains fairly positive, he noted.
Judging by the policy stance, he said, the RBI will likely continue to advance its rate hikes and the next round could push the key rate to 5.75 percent.
Noting that the central bank has kept its stance unchanged on “withdrawal of accommodation,” he said this once again indicates that the notion of stance is determined by the liquidity in the system and in turn the level of overnight interest rates rather than the level of overnight interest. repo rate increases.
According to Soumya Kanti Ghosh, group chief economic adviser at SBI, the rate hike points to three possibilities:
(a) the last 50 bp increase had no material impact on the inflation path at this point and will affect inflation in the longer term,
(b) RBI does not want to lower inflation forecast at this time as it wants to stay ahead of the curve in an uncertain global environment; and
(c) the 50bp gain is an indication that RBI is more concerned about the rupee and the external situation by using interest rates as a defense to protect the domestic currency.
He added that while the RBI has pre-loaded the rate hikes, it remains to be seen how this will affect the rupee’s trajectory in the medium term.
Zarin Daruwala, CEO of the cluster — India and South Asia, Standard Chartered Bank, said the policy move is yet another confirmation of its stance on housing withdrawal, and reaffirms its confidence in the domestic economic recovery.
Aside from curbing inflation, the rate hike will also strengthen and stabilize the rupee in the face of geopolitical uncertainties, she said.
Citi India chief executive Ashu Khullar said the RBI has shown its determination to maintain macro stability by curbing inflationary impulses and using its buffers to keep the external front stable.
Shanti Lal Jain, MD and CEO of Indian Bank, said allowing independent primary dealers to offer forex services as authorized dealer category banks will strengthen the forex market.
Enabling cross-border payment system for inbound bills will improve the ease and convenience of NRIs along with the forex influx, he added.
South Indian Bank chief executive Murali Ramakrishnan said the policy calibration measures should be seen from the macro perspective of trying to balance both growth and inflation in volatile times.