RBI Hikes Repo Rates

RBI Hikes Repo Rates

At last, the Reserve Bank of India (RBI)ย has taken the right step to address rising inflation worries by ๐ข๐ง๐œ๐ซ๐ž๐š๐ฌ๐ข๐ง๐  ๐ซ๐ž๐ฉ๐จ ๐ซ๐š๐ญ๐ž๐ฌ ๐Ÿ๐ซ๐จ๐ฆ ๐Ÿ’๐ŸŽ ๐›๐ฉ๐ฌ ๐ญ๐จ ๐Ÿ’.๐Ÿ’% ๐š๐ง๐ ๐ข๐ง๐œ๐ซ๐ž๐š๐ฌ๐ข๐ง๐  ๐ญ๐ก๐ž ๐‚๐‘๐‘ ๐›๐ฒ ๐Ÿ“๐ŸŽ ๐›๐ฉ๐ฌ to drain excess liquidity.

Today, I checked the 1๐ŸŽ๐ฒ๐ซ ๐†๐Ž๐ˆ ๐›๐จ๐ง๐ ๐ฒ๐ข๐ž๐ฅ๐๐ฌ ๐š๐ง๐ ๐”๐’ ๐Ÿ๐ŸŽ ๐ฒ๐ซ ๐ญ๐ซ๐ž๐š๐ฌ๐ฎ๐ซ๐ฒ ๐›๐จ๐ง๐ ๐ฒ๐ข๐ž๐ฅ๐๐ฌ, ๐š๐ง๐ ๐ญ๐ก๐ž ๐ฒ๐ข๐ž๐ฅ๐ ๐ง๐ฎ๐ฆ๐›๐ž๐ซ๐ฌ ๐š๐ซ๐ž ๐Ÿ•.๐Ÿ’% ๐Ÿ๐จ๐ซ ๐Ÿ๐ŸŽ ๐ฒ๐ซ ๐†๐Ž๐ˆ ๐›๐จ๐ง๐๐ฌ ๐š๐ง๐ ๐Ÿ.๐Ÿ—๐Ÿ’% ๐Ÿ๐จ๐ซ ๐ญ๐ก๐ž ๐”๐’.

However, looking at fed rate hikes and current CPI inflation at 6.95%, which is higher than the 4.4% repo rate, i anticipate the following in the future:

1)A ๐ก๐ข๐ค๐ž ๐ข๐ง ๐ข๐ง๐ญ๐ž๐ซ๐ž๐ฌ๐ญ ๐ซ๐š๐ญ๐ž๐ฌ ๐ฌ๐ก๐จ๐ฎ๐ฅ๐ ๐ง๐จ๐ญ ๐ข๐ฆ๐ฉ๐š๐œ๐ญ ๐ ๐ซ๐จ๐ฐ๐ญ๐ก as this action reduces surplus liquidity in the system.

2)RBI will continue to hike repo rates by a series of rate increases to bring the ๐ซ๐ž๐ฉ๐จ ๐ซ๐š๐ญ๐ž ๐ญ๐จ ๐Ÿ“.๐Ÿ๐Ÿ“% (pre-pandemic level).

3)As the ๐”๐’ ๐ฐ๐ข๐ญ๐ง๐ž๐ฌ๐ฌ๐ž๐ฌ ๐ฌ๐ญ๐š๐ ๐Ÿ๐ฅ๐š๐ญ๐ข๐จ๐ง, where the growth is reducing, and inflation continues to rise, ๐…๐ˆ๐ˆ๐ฌ ๐ฐ๐ข๐ฅ๐ฅ ๐ข๐ง๐ญ๐ž๐ง๐ฌ๐ข๐Ÿ๐ฒ ๐ญ๐จ ๐ฌ๐ž๐ฅ๐ฅ ๐จ๐Ÿ๐Ÿ ๐ˆ๐ง๐๐ข๐š๐ง ๐ž๐ช๐ฎ๐ข๐ญ๐ข๐ž๐ฌ, causing depreciation of INR against USD. However, the net effect would not worsen as we have foreign exchange reserves of $600 billion to cover oil and food imports.

As RBI moves repo rates to pre-pandemic levels, we need to check if this increase in interest rates would bring back the inflation in control. However, if inflation continues to be higher, the reason is the higher growth and not the surplus liquidity, which is good news. In that case, i assume RBI should stop hiking interest rates as that would derail the growth.

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