MADAN SABNAVIS, Chief Economist-Bank of Baroda, says repo rate hike will help to quell the build-up of excess demand pressures
The RBI has surprised the market with its two-pronged approach of withdrawal of accommodation which is increase of repo rate by 40 bps and CRR by 50 bps. This is more in line with what the MPC spoke of withdrawal of accommodation in the April policy. This is indicative of the fact that there would be more such action taken over time depending on the evolving inflationary situation.
We had expected 50 bps increase in repo rate in CY2022 but would now believe that there would be a further hike of 50 bps in the year. These twin measures hence affect both the quantum of surplus liquidity in the system as well as the cost of funds.
The hike in repo rate will help to quell the build-up of excess demand pressures and hence slow down the growth in inflation though it cannot affect some of the components that are driven by global factors.
The overarching focus on inflation is significant as it goes back to the normal mandate of the MPC which is to curb inflation as growth seems to be better placed today. But not tackling inflation now, growth can be jeopardized. This will be the main message from the so-called interim policy announced.