Wednesday 7 December 2022
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EconomyRepo rate hike to 6% by year-end: Fighting inflation, biting middle class

Repo rate hike to 6% by year-end: Fighting inflation, biting middle class

As domestic retail inflation refuses to recede, with the figure crossing 7% again in August, the Reserve Bank of India (RBI) may raise the repo rate to 6% from 5.4% now, HSBC Global Research said in a report. “We expect rate hikes in the remaining two meetings of 2022, taking the repo rate from 5.4% now to 6% in December," it said. "We believe the RBI will continue to press ahead with rate hikes as the MPC (monetary policy committee) members seem more confident about growth recovery than falling inflation."

Repo rate hike: Impact on middle class

Repo rate hikes, while fighting easy availability of money (liquidity) in the market, also prove a bane for the middle class whose lives run on equated monthly instalments (EMI) in this day and age. The EMIs are bound to rise again with another repo rate hike, as the banks are sure to pass on the extra cost of borrowing from the RBI to their customers.

Already, government-owned lender Union Bank of India has increased its marginal cost-based lending rate (MCLR) in the range of 0.05% to 0.35%, which would make the loans from the bank more expensive. As per a UBI notification, the new rates have already become effective from 11 September. The MCLR is the base rate adopted by banks that acts as a key point in deciding various loan rates. Almost all the banks have revised their lending rates after the Reserve Bank of India raised its key repo rate last month by 50 bps to 5.40% to tame the rising CPI inflation.

Customers of India’s largest private sector lender HDFC Bank are likely to have to shell out more money as interest if they have taken any loan from the lender. The HDFC Bank has hiked its s increased its marginal cost of lending rate or MCLR across all tenors. The new HDFC Bank MCLR rates have come into effect from 7 September. The HDFC Bank MCLR rate hike comes at a when several banks are hiking their lending rates. In the last three months, the HDFC Bank has hiked its lending rates by as much as 65 bps.

Pressure to check price rise on the other hand

Price pressures returned in August, with India’s retail inflation quickening to 7% after cooling to a five-month low in July. The increase, led by prices, makes it the eighth month that retail inflation has stayed above the central bank’s upper tolerance limit of 6%, strengthening the case for continued monetary tightening.

RBI has projected Price Index (CPI) based inflation for 2022-23 at 6.7%.

India’s industrial activity, on the other hand, decelerated sharply to a four-month low in July as a favourable base effect faded and demand showed signs of slowing down, official data showed.

The rise in August CPI inflation was largely in line with market expectations. The sequential momentum, too, rose a tad, by 0.3% month-on-month, on a seasonally adjusted basis compared to a contraction of 0.6% in July, Pranjul Bhandari, chief economist at HSBC, said.

“Combining the two, we think the repo rate can be raised to 6%," Bhandari said.

Inflation is expected to remain elevated over the next couple of months due to last year’s low base, even as easing and commodity prices globally help cool inflationary pressures. The MPC had raised the repo rate by 50 basis points for the third in a row in August, taking the policy rate to pre-pandemic levels of 5.4%. The MPC meets again from 28 to 30 September.

According to the RBI Act, the central bank has a mandate to keep inflation at 4 per cent, plus or minus 2 per cent. If average inflation stays beyond the 2-6 per cent range for three consecutive quarters, it is seen as a failure of monetary policy and the central bank is mandated to write a letter to the government explaining the reason for its failure and steps that would be taken to correct the situation.

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