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RBI hikes repo rate by 35 bps to 6.25%

Central bank’s move was on the line of forecast made by Bizz Buzz in its Dec 5th edition; Until RBI isn't completely sure on inflation's downward trend, it may opt for a smaller rate increase, as it has to also focus on growth apart from taming inflation: Experts

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Mumbai: As predicted by Bizz Buzz in its lead story in its edition on December 05, the Reserve Bank of India (RBI) has on Wednesday increased its repo rate by 35 basis points to 6.25 per cent. This announcement came on the concluding day of three-day bi-monthly meeting of RBI's Monetary Policy Committee (MPC) which deliberated at length before taking the rate hike call.

The apex bank delivered the rate hike despite the apprehensions expressed by the India Inc that any rise in cost of funds would be detrimental to the country's economic growth. That way, RBI continued its established role as inflation warrior. It now aims at bringing down retail inflation below 6 per cent in the near term. The inflation remained above comfort zone for 10 months in a row.

The latest rate hike, the fifth straight increase since May, raised prospects of EMIs for home, auto and other loans going up further. The previous four increases totalled 190 bps, with the last three hikes being 50 bps each. Overall, RBI increased key rate by 225 basis points, thus taking key repo rate to 6.25 per cent. The MPC, comprising three members from the RBI and three external members, raised the key lending rate this time by a 5:1 majority decision.

Anu Aggarwal, Head Corporate Banking, Kotak Mahindra Bank, says, "The 35 bps hike is as per market expectations. The positive is RBI has broken the 50-bps rate-hike trend as growth headwinds intensify amid easing inflation pain. Until RBI isn't completely sure on inflation's

downward trend it may opt for a smaller rate increase, as it has to also focus on growth amid bets of easing inflation pressure."

The RBI policy announcement today was in line with expectations in terms of raising the policy rate by 35 bps and keeping the policy stance unchanged. However, the policy tone was distinctly more Hawkish than expected. When a central bank combines its sanguine view on growth with continued concerns on inflation – particularly the persistence in core inflation – it suggests that it is prepared to continue its fight against inflation and has the space and willingness to raise rates further.

The central bank emphasized that it is not ready to let up its inflation battle and aims to bring down inflation below 6 per cent in the near term and then closer to 4 per cent over the medium term.

Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank, said, "There were other signs in the governor's statement that suggested that tightness in financial conditions could intensify going forward. While the RBI continued to re-iterate that it would continue to manage liquidity conditions through fine tuning operations, it auctioned markets to wean themselves off the surplus liquidity overhang and not take it for granted."

Today's policy announcement does provide a soft support for the rupee ahead of the Fed meeting next week and can be viewed perhaps as an attempt by the RBI to continue aligning itself with the still Hawkish G7 central banks. Furthermore, the RBI's continued emphasis on the factors that lend support to the rupee, signals its preference for a stable rupee going forward implying intervention on both sides of the market to keep it range bound into 2023.

Bottom line is that the policy announcement today signalled that more rate hikes are in the offing. Barua expects the terminal rate to be close 6.5-6.75 per cent per cent."

Atul Monga, Founder and CEO, Basic Home Loan, says, "As interest rates rise, the impact of monthly installments for both new and existing customers will be felt. For instance, if the rate of interest is hiked by 0.35, then the EMI of a loan of Rs10 lakh taken at 8.5 per cent for ten years will increase by around Rs300. To deal with the impact of a higher interest rate, it is important to maintain good credit, research the best rate offers, and consider refinancing existing loans to lower the monthly payments customers can also opt for long tenures or switch to a floating rate of interest."

Kumud Das
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