Mumbai: The cost of money, as reflected in deposit rates, is expected to rise gradually with hawkish policy statements from the Reserve Bank of India. The development comes even as the central bank kept rates unchanged but on Friday announced the withdrawal of excess liquidity and prioritized inflation over growth.
RBI Governor Shaktikanta Das announced the unanimous decision of the six-member Monetary Policy Committee (MPC) to keep rates unchanged for the 11th time in a row, citing uncertainties stemming from the war in Europe. The repo (rate at which the RBI lends to banks) and the reverse repo (rate at which it borrows from banks) remain at 4% and 3.35% respectively. Das, however, raised the money market rate floor by introducing a permanent deposit facility (another window where RBI allows banks to park funds with it) to 3.75%.
Yields on 10-year government bonds hit a high of 7.12% in the early morning, crossing 7% for the first time in nearly three years after RBI raised inflation forecasts by more than 1 %, rising from 4.5% to 5.7%. With credit picking up in the third quarter, actions taken by the RBI to drain liquidity could see deposit rates rise over the next couple of months. However, mortgage rates will not increase because they are directly linked to the repo rate, which serves as an external benchmark for banks.
As the impact of the pandemic on the economy fades, the new risk is war in Europe. “Two years later, as we emerged from the pandemic situation, the global economy experienced tectonic shifts from February 24, with the start of war in Europe, followed by sanctions and an escalation of geopolitical tensions. “Das said.
Economists called the policy hawkish and said bond yields would rise, translating into higher cost of funds. “In the sequence of priorities, we put inflation ahead of growth because we thought the timing was right,” Das said. He added that if the stance continues to be accommodative, the RBI is gradually withdrawing the accommodation.
“As the repo rate is unchanged, bank loans linked to the repo rate will not be affected and the Governor has ensured sufficient liquidity,” said AK Goel, Managing Director and CEO of Punjab National Bank and Chairman of the Association of Indian Banks. Goel added that the RBI has extended the rationalization of risk weights for individual housing loans until March 2023, which will encourage banks to lend more for housing.
Explaining the RBI’s position, Das said there continues to be an output gap in the economy. “Capacity utilization improved compared to the previous quarter. It was 68.3 and now it’s 72.4. Even with the 8.9% growth estimate, private consumption and fixed investment are only 1.2% and 2.6% respectively – above their pre-pandemic levels,” said Das.
As part of the policy measures, Das also announced the establishment of a committee to review and review the current state of customer service in RBI-regulated entities, the adequacy of customer service regulation and to suggest measures to improve it.
“While inflation has the potential to surprise on the upside relative to RBI projections, growth remains an ongoing recovery. From this perspective, the market cacophony of sharp rate hikes as even the numbers Growth rates for FY22 are likely to be well below the official CSO projections of 8.9% could be misplaced at best,” said SBI Group Chief Economist Soumya Kanti Das. the first-order rise would not occur until H2FY23, but that deposit rates could rise over the next couple of months.
RBI Governor Shaktikanta Das announced the unanimous decision of the six-member Monetary Policy Committee (MPC) to keep rates unchanged for the 11th time in a row, citing uncertainties stemming from the war in Europe. The repo (rate at which the RBI lends to banks) and the reverse repo (rate at which it borrows from banks) remain at 4% and 3.35% respectively. Das, however, raised the money market rate floor by introducing a permanent deposit facility (another window where RBI allows banks to park funds with it) to 3.75%.
Yields on 10-year government bonds hit a high of 7.12% in the early morning, crossing 7% for the first time in nearly three years after RBI raised inflation forecasts by more than 1 %, rising from 4.5% to 5.7%. With credit picking up in the third quarter, actions taken by the RBI to drain liquidity could see deposit rates rise over the next couple of months. However, mortgage rates will not increase because they are directly linked to the repo rate, which serves as an external benchmark for banks.
As the impact of the pandemic on the economy fades, the new risk is war in Europe. “Two years later, as we emerged from the pandemic situation, the global economy experienced tectonic shifts from February 24, with the start of war in Europe, followed by sanctions and an escalation of geopolitical tensions. “Das said.
Economists called the policy hawkish and said bond yields would rise, translating into higher cost of funds. “In the sequence of priorities, we put inflation ahead of growth because we thought the timing was right,” Das said. He added that if the stance continues to be accommodative, the RBI is gradually withdrawing the accommodation.
“As the repo rate is unchanged, bank loans linked to the repo rate will not be affected and the Governor has ensured sufficient liquidity,” said AK Goel, Managing Director and CEO of Punjab National Bank and Chairman of the Association of Indian Banks. Goel added that the RBI has extended the rationalization of risk weights for individual housing loans until March 2023, which will encourage banks to lend more for housing.
Explaining the RBI’s position, Das said there continues to be an output gap in the economy. “Capacity utilization improved compared to the previous quarter. It was 68.3 and now it’s 72.4. Even with the 8.9% growth estimate, private consumption and fixed investment are only 1.2% and 2.6% respectively – above their pre-pandemic levels,” said Das.
As part of the policy measures, Das also announced the establishment of a committee to review and review the current state of customer service in RBI-regulated entities, the adequacy of customer service regulation and to suggest measures to improve it.
“While inflation has the potential to surprise on the upside relative to RBI projections, growth remains an ongoing recovery. From this perspective, the market cacophony of sharp rate hikes as even the numbers Growth rates for FY22 are likely to be well below the official CSO projections of 8.9% could be misplaced at best,” said SBI Group Chief Economist Soumya Kanti Das. the first-order rise would not occur until H2FY23, but that deposit rates could rise over the next couple of months.
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