“While the MPC voted unanimously to increase the policy repo rate by 50 basis points to 4.90 percent, it is important to take into consideration that RBI has three broad mandates besides inflation – one is supporting growth, the other is assessing the government’s borrowings, and finally maintaining the payment and settlement system. And most important they have to balance all these. Today we are seeing that the inflation targeting seems to be slightly misaligned with growth while being a critical contributor to it. But it is critical to understand that RBI slashed the repo rate in 2020 to cushion the impact of COVID and now the focus is back on regulating inflation. So, as the governor mentioned, we will have some ups and downs, and external influencers, such as crude oil, metals, and food in some cases, which are not in RBI’s control will also have a considerable impact. At this point, RBI will require all its skill and commitment to keep inflation and inflationary expectations under check. And if external forces are controlled to some extent, we may see moderation going forward.
From a lending perspective, this will certainly cause a rate hike in deposits and an immediate impact on retail loans. The overall increase in the cost of funds will definitely impact the overall feasibility of large and long gestation projects. On the other hand, MSMEs that are still recovering from the two years of uncertainty, require assurance of funds rather than cost alone. We believe, they will be able to handle this surge in repo rate, as long as it stays in this range over the medium term.
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