RBI Hikes Repo Rates

RBI Hikes Repo Rates

At last, the Reserve Bank of India (RBI) has taken the right step to address rising inflation worries by 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐢𝐧𝐠 𝐫𝐞𝐩𝐨 𝐫𝐚𝐭𝐞𝐬 𝐟𝐫𝐨𝐦 𝟒𝟎 𝐛𝐩𝐬 𝐭𝐨 𝟒.𝟒% 𝐚𝐧𝐝 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐢𝐧𝐠 𝐭𝐡𝐞 𝐂𝐑𝐑 𝐛𝐲 𝟓𝟎 𝐛𝐩𝐬 to drain excess liquidity.

Today, I checked the 1𝟎𝐲𝐫 𝐆𝐎𝐈 𝐛𝐨𝐧𝐝 𝐲𝐢𝐞𝐥𝐝𝐬 𝐚𝐧𝐝 𝐔𝐒 𝟏𝟎 𝐲𝐫 𝐭𝐫𝐞𝐚𝐬𝐮𝐫𝐲 𝐛𝐨𝐧𝐝 𝐲𝐢𝐞𝐥𝐝𝐬, 𝐚𝐧𝐝 𝐭𝐡𝐞 𝐲𝐢𝐞𝐥𝐝 𝐧𝐮𝐦𝐛𝐞𝐫𝐬 𝐚𝐫𝐞 𝟕.𝟒% 𝐟𝐨𝐫 𝟏𝟎 𝐲𝐫 𝐆𝐎𝐈 𝐛𝐨𝐧𝐝𝐬 𝐚𝐧𝐝 𝟐.𝟗𝟒% 𝐟𝐨𝐫 𝐭𝐡𝐞 𝐔𝐒.

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 𝐡𝐢𝐤𝐞 𝐢𝐧 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐫𝐚𝐭𝐞𝐬 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐢𝐦𝐩𝐚𝐜𝐭 𝐠𝐫𝐨𝐰𝐭𝐡 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 𝐫𝐞𝐩𝐨 𝐫𝐚𝐭𝐞 𝐭𝐨 𝟓.𝟏𝟓% (pre-pandemic level).

3)As the 𝐔𝐒 𝐰𝐢𝐭𝐧𝐞𝐬𝐬𝐞𝐬 𝐬𝐭𝐚𝐠𝐟𝐥𝐚𝐭𝐢𝐨𝐧, where the growth is reducing, and inflation continues to rise, 𝐅𝐈𝐈𝐬 𝐰𝐢𝐥𝐥 𝐢𝐧𝐭𝐞𝐧𝐬𝐢𝐟𝐲 𝐭𝐨 𝐬𝐞𝐥𝐥 𝐨𝐟𝐟 𝐈𝐧𝐝𝐢𝐚𝐧 𝐞𝐪𝐮𝐢𝐭𝐢𝐞𝐬, 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.