Experts' take on repo rate hike: RBI has struck right inflation-growth balance

The RBI has endeavoured to strike the right balance between inflation and growth at this critical juncture, industry experts on Wednesday said after a 50 basis points hike in the key rate by the central bank.

Announcing the credit policy, Reserve Bank Governor Shaktikanta Das said that the Indian economy is resilient, though negative global spillovers continue to weigh on the domestic economic growth outlook.

Also read: RBI hikes repo rate yet again, this time by 50 bps to 4.9%

CII Director General Chandrajit Banerjee said the RBI’s decision to raise the policy repo rate by 50 bps has been noted, given the imperatives of anchoring inflationary expectations. “The RBI has demonstrated restraint and foresight to strike the right balance between inflation and growth,” he said.

Growth imperatives

Industry chamber Assocham said the RBI decision to raise the repo rate is largely on the expected lines and seemed unavoidable.

“While the MPC has decided to withdraw the accommodative stance to rein in inflation, it also remains cognizant of the growth imperatives of the economy, retaining the policy rate below the pre-pandemic level,” said Assocham Secretary General Deepak Sood.

Akhil Saraf, founder and CEO of Reloy, said an increase in the repo rate will push the lending rates up and eventually it will hit home-buyers pockets. “However, given the possibility that interest rate goes up by 50-100 basis points, it will still remain under the comfort zone of below 8 per cent per annum. With other factors and market conditions in favour of home buyers, sales momentum is expected to continue without any major hiccups,” he added.

The second hike in repo rate comes within five weeks of the RBI increasing the key interest rate by 40 basis points in an off-cycle monetary policy review on May 4.

Impact on costs

PHD Chamber President Pradeep Multani believed that hard lending from an accommodative policy stance is disappointing as it will have an impact on costs of doing business and production possibilities.

“Any increase in the interest rate increases the costs of doing business, which is already high vis-a-vis high raw material costs amid geopolitical distress,” Multani pointed out.

On announcements regarding cooperative banks, Andromeda and Apnapaisa Executive Chairman V Swaminathan said the RBI has considered the cooperative banks as equal partners in the growth, thus raising their lending limit by 100 per cent.

Easier credit for real estate

“This move can be seen as a major boost for the real-estate sector as it will now enhance the availability of easy credit for the residential housing segment,” Swaminathan said. Askcred.com founder and CEO Aarti Khanna said the RBI has increased the existing limits on individual housing loans by cooperative banks both for Urban Co-operative Banks and Rural Cooperative Banks. “This would give some uplift to the affordable housing segment,” Khanna said.

Deloitte India Economist Rumki Majumdar said the 100 bps increase in inflation projection by the RBI is worth noting. Majumdar said with steps taken to increase the penetration of digital payment systems, it is expected that the velocity of money (the pace at which an average rupee changes hand) will likely be rising in the future. “So, that will also add to inflationary pressures,” Majumdar opined.

Ample liquidity

Rohit Arora, CEO and co-founder, Biz2Credit and Biz2X, said the RBI’s decision today to increase the policy rates by 50 basis points is not a surprise.

“…in fact, we expect a few more hikes in times to come to put a check on inflation and to ensure a neutral to the marginally positive real policy rate. We believe that the lending rates may go up gradually, and since there is enough liquidity in the system, our borrowing cost may go up only gradually,” Arora said.

Arun Kumar, Head of Research, FundsIndia, was of the opinion that the 2-6 per cent inflation band is now expected to be breached for three consecutive quarters. “Given this context, the RBI is expected to front-load its rate hike actions,” Kumar said.

Rajiv Shastri, Director and CEO, NJ AMC, said higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward. However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers, Shastri added.

Trust Mutual Fund CEO Sandeep Bagla said that in India, there is raging inflation at 7.8 per cent, higher capacity utilisation, and growing consumer confidence, and yet the policy rate has been hiked to 4.9 per cent only, which is lower than pre-pandemic levels. “The ideal effective overnight rate should be closer to 6 per cent, but at this pace, it might take us 3-4 policies more to reach there,” Bagla opined.

Linking credit cards with UPI

Finology Ventures CEO Pranjal Kamra said apart from the rate hike, encouraging moves have been taken to promote digitisation like linking of credit cards with UPI and increase in e-mandate limits. All these measures, including banking tweaks, to promote affordable housing seem to be unorthodox and practical, with the RBI playing its central bank role almost perfectly, Kamra said.

Ficci Senior Vice President Subhrakant Panda said that while the RBI is clearly targeting inflation, “we are encouraged to note that the projection for GDP growth for the current year has been retained”.

The RBI and government, Panda said, were steadfast in their approach to support the economy through the challenging period of the pandemic.

The next meeting of the Monetary Policy Committee (MPC), the rate-setting panel of RBI, is scheduled for August 2-4, 2022.

With agency inputs