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Reason For REPO Rate Hike

Reason For REPO Rate Hike

RBI has hiked the repo rate by 50 bps to 5.40%, with this increase, the policy rate in August has surpassed the pre-pandemic levels (5.15% in Feb’20). Given the substantial decline in the amount of excess liquidity in the banking system along with the increase in credit offtake, liquidity management is expected to be adjusted. The policy measures are aimed to include steps which ensure that there is adequate liquidity available in the banking system.

Basis of this revised monetary policy:

1.Economic Growth Momentum stays-

The Indian economy has continued to grow and revive despite the effects of global geopolitical unrest and the state of the financial markets. Most economic indices now indicate economic activity levels are higher than they were before the outbreak in India.

2.Despite being high, inflation has moderated from its peaks-

The World Bank Commodity price tracker shows that prices have declined across agriculture (by 10%), fertilizers (by 13%), industrial metals (by 29%), precious metals (by 13%) and crude oil (by 6.5%) in the four months to July’22.

3. Factors which lead to moderate inflation-

Cut in excise duty on transport fuels, reduction in import duty on edible oil, increase in fertilizer subsidy and restriction on export of some key food commodities by the government. Alongside this, global supply chains also normalised gradually, and the central banks throughout the world are undertaking policies to control inflation.

4. Bank deposit growth slows as credit offtake gathers pace

Bank deposits have been growing at a slower rate in the current financial year while credit demand has registered a significant increase, this reflects the advancements in the economy. Banks have been lending more than their deposits, evident by the credit-deposit ratio as on 15th July 2022, which is 113%. There has been broad-based improvement in credit demand across segments.

5. Faster than substantial reductions in the liquidity surplus

For last 37 months there was adequate surplus liquidity, while in recent weeks, the financial system's liquidity excess has shrunk significantly. In early April of this year, the average (net) outstanding liquidity surplus was over INR 7.6 lakh crore; by the last week of July of this year, it had decreased to INR 0.64 lakh crore. The constrained liquidity situation of some segments of the banking sector has pushed up the call money market rate (to 5.06% in the last week of July'22, the highest levels since March'20).