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RBI's step is bold and futuristic, no matter if it comes at a cost

The Reserve Bank of India’s (RBI), by way of sits off-policy rate hike that too on the eve of Fed’s step falling on the similar lines has to be welcome wholeheartedly despite some shocks in terms of hardening of lending rates.

RBI‘s step is bold and futuristic, no matter if it comes at a cost
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RBI may hike rates by 75 bps by Aug

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The Reserve Bank of India's (RBI), by way of sits off-policy rate hike that too on the eve of Fed's step falling on the similar lines has to be welcome wholeheartedly despite some shocks in terms of hardening of lending rates.

Of course, it may be termed as the apex bank's two-pronged approach of withdrawal of accommodation by increasing the repo rate by 40 bps and CRR by 50 bps.

This is indicative of the fact that there would be more such action taken over time depending on the evolving inflationary situation. The RBI Governor, Shaktikanta Das, cited the sustained rise in CPI and increasing acute inflationary pressures for the hike.

The MPC, in its last bi-monthly review, had indicated about withdrawal of the 'accommodative' policy, hinting at more rate hikes down the road. The hike in the key policy rate will address the issue of inflationary stress due to supply side disruptions, elevated commodity prices and volatile financial markets. Taking a cue from the RBI'S move, a host of banks have upped benchmark lending rates tracking the rise in money market rates.

The central bank justified its rate action as a step to control the second-round impact of inflationary pressures and an effort to anchor inflation expectations.

The policy announcement, as per a report by HDFC Bank, came just ahead of the US Fed meeting, where in the latter raised rates by 50 bps and laid down the roadmap for quantitative tightening.

The rate increase by the RBI puts in place a pre-emptive 'traditional defence' for the rupee against capital outflows as global monetary policy tightens. The USD/INR pair was trading at 76.35 on the day, appreciating by 0.22 per cent. In other words, the Rupee has been broadly stronger on the news and corrected heavily but the sentiment for the rupee remains weak on account of inflationary concerns. Frankly speaking, RBI had to bite the bullet while taking the historic step. Now, as an old adage goes on, there are always both sides of a coin. This move will curb excess liquidity in the system and will make auto loans expensive.

While PV segment may be able to absorb this shock due to long waiting periods, 2W segment which has been a non-performer due to underperforming rural market, vehicle price hikes and high fuel costs, the industry will have to feel the pinch.

So, it will apply certain amount of brakes on auto retail and dampen the sentiments further. Banks can now avail of a higher rate for surplus liquidity parked with the RBI. Banks will then accordingly demand a higher rate for funds lent out to borrowers. The surge in government bond yields will also translate into higher cost of funds as sovereign debt is the benchmark for pricing a vast variety of credit products. As every coin has got both the sides, dark and bright and so the RBI's move.

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