RBI To Hike Repo Rate In June To Tackle Rising Inflation

Retail inflation accelerated to nearly 7% in March

Repo rate is a rate at which banks borrow money from the central bank in case they run short of funds. The commercial banks sell their securities to the central bank to maintain liquidity. Inflation on the other hand is an event that occurs when purchasing power of the consumers decline and prices begin to increase in the market. 


The repo rate and inflation have an inverse relationship. When the repo rate is increased, inflation comes down. If the repo rate decrease, inflation rises. Controlling the repo rate is one of the major tools used by central banks to control inflation.


When the central bank increases the repo rate the money supply in the economy reduces hence it helps in curbing inflation. The Reserve Bank of India manages repo rate and reverse repo rate periodically to strike a balance in the economy. 


The Reserve Bank of India will raise its repo rate in June and hike at a faster pace than predicted just a few weeks ago as a surge in inflation puts pressure on the central bank to act quicker, a Reuters poll showed. 


Retail inflation accelerated to nearly 7% in March, above the 6% upper limit of the central bank's targeted range, and will likely soar further as a spike in global energy prices since Russia's invasion of Ukraine seeps into consumer prices. 


The Monetary Policy Committee (MPC) kept its rate at a record low 4.0% at its April meeting despite shifting its focus to inflation from growth. But March's 17 - month - high inflation number leaves little room for the RBI other than hiking sooner rather than later, and all but there of 46 economists in an April 20-25 Reuters poll expected the RBI to raise the repo rate for the first time since 2018 in June. 


While 42 expected a 25-basis point hike to 4.25%, only one predicted a 50 basis point hike. Just a few weeks ago, fewer than a quarter of economists - 12 to 50 - were expecting the first hike to come in June, and instead the majority were predicting the first rate rise in August. 


"Given the elevated inflation trajectory and a very realistic chance of the MPC facing its first official "failure" of the monetary policy framework, the RBI will shift its stance to "neutral" in June and embark on a short rate hiking cycle," said Rahul Bajoria, chief India economist at Barclays. 


More hikes were expected to follow in the coming quarters, taking the repo rate to 4.75% and 5.25% by end - 2022 and end - 2023 respectively, compared with 4.50% and 5.00% in the previous poll. If realised, the RBI would be the latest to join its peers who have already begun their tightening cycles to tame multi - decade high inflation, a few even raising rates by half - percentage points. 

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