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Passing on of rate actions slow due to barriers: RBI


Mumbai, Nov 16, 2022

Reserve Bank of India (RBI) deputy governor Michael Patra has said that, while repo-linked loans have improved monetary policy transmission, there continue to be impediments to the central bank’s actions getting passed on to markets. Repo is the rate at which the RBI lends to banks and it is linked to all retail loan rates.

According to Patra, other benchmarks like marginal cost of lending rate (MCLR), which have annual resets, delay transmission. Also, non-banking finance companies do not follow any uniform method in pricing their loans.

Speaking to treasury heads at a seminar organised by the RBI at Lonavala last weekend, Patra said that in extraordinary times like the present it pays for market participants and the central bank to share a common set of expectations as “macroeconomic and financial stability involves shared benefits and, for both, high stakes”.

Patra’s comments on the inadequacy of the policy transmission came even as several economists forecast that the RBI would slow down the pace of rate hikes in the wake of inflation easing below 7% and the target bracket of 4-6% now in sight. The RBI’s repo rate has risen by 190 basis points (100bps = 1 percentage point) to 5.9% since May 4. With RBI governor Shaktikanta Das stating that inflation will come within the target range of 6% only in Q4FY23, many are expecting another couple of rounds of rate hikes.

However, with consumer price index (CPI) inflation easing to 6.77% in October and a further decline in sight due to the base effect in the last quarter, many expect the RBI to slow down the pace of hikes.

“In terms of policy response, we pencil in a 35bps rate hike in the December policy review and peg the terminal rate for the current rate hike cycle at 6.5%, to be reached by February 2023,” Morgan Stanley chief India economist Upasana Chachra said. She added risks of a higher increase in policy rates in December’s review will be contingent on external factors such as oil prices and/or capital market environment.

The next meeting of the RBI’s monetary policy committee (MPC) is scheduled during December 5 to 7. With only 20 days to go, a rate hike is seen as a certainty.

“With the CPI inflation remaining solidly above the MPC’s 6% tolerance level, we believe another rate hike is certain in December. However, its size is likely to be tempered to 35bps from the 50bps seen in the last three reviews, given the moderation in CPI inflation in October and the expectations of a further dip in November,” said ICRA chief economist Aditi Nayar.

Besides inflationary pressures, the need to follow central banks of advanced economies is also seen as a driver for rate hikes. According to Madhavi Arora of Emkay Global, the RBI will frontload its rate hikes with a 35bps increase in December. “As we closely watch global policy re-pricing and evolution of the global pace of inflation, we reckon that the RBI is still some time away from its supposed forward real neutral rate of 0.8-1%, implying future hikes totalling 50-60bps and policy stance formally turning neutral in coming months,” she said.

[The Times of India]

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