July , 2022
Monetary Policy : RBI turns hawkish Saptarshi Roy Bardhan
21:40 pm

Saptarshi Roy Bardhan

The Reserve Bank opened its year ’22 calendar with a rather sanguine outlook. In terms of challenges of upwardly moving inflation rate since October 2021, post Covid reigning of excess liquidity in the system had found place in its agenda.  

It all started in the February of 2019 when the first cut of 25 bps (1 bps = one hundredth of percentage) from the then existing repo rate of 6.50% towards mitigating the impact of Covid-19 pandemic. The entire of FY  2019-20 saw a galore of rate cuts and the Monetary Policy Committee followed an accommodative stance well into FY 2020-21, when the rate hit the nadir of 4%.


Repo rate (%)

+ / -              (in bps)


Repo rate (%)

+ / -              (in bps)

FY 2018-19

FY 2020-21






- 40



- 25

FY 2021-22

FY 2019-20



+ 40



- 25



+ 50



- 25














Repo rate movement Source RBI database

While cut in the policy repo rate by 115 bps during March-May 2020, on top of a cumulative reduction of 135 bps during February 2019 to February 2020 it was backed by conventional and unconventional liquidity measures, these actions bolstered financial market sentiments while ensuring orderly market conditions. As a result, both interest rates and bond yields trajectory travelled south across market segments and spreads narrowed, with a distinct improvement in monetary transmission.

Easing of money supply is, what they call, a double-edged sword. While it addressed the   liquidity constraints in the face of Covid-19 related dislocations and eased financial stress, unclogged monetary transmission and credit flows while ensuring financial stability, the headline inflation also takes a fresh flight from September ‘21 (4.35%) to reach 7.79% in April 2022 which is higher than the official or implicit target figure. These phenomena hit a number of countries alike - e.g. US, UK, Germany, Spain, Canada and Belgium, being the major ones. Some of the Asian counterparts however have comfortable inflation scenarios like Japan, Indonesia, South Korea, Taiwan, Hong Kong, Maldives etc. which are substantially lower than the previous group. And of course, there is China where inflation is still not a problem perhaps because of the stricter lockdown which might have suppressed the domestic demand and therefore, the price rise.

These varied inflation numbers globally would mean that bringing back the equilibrium would call for the normalisation process by different central banks to be in sync which is again a zero possibility in real life; this is because different central banks do it at different speed and over different timelines. Normalisation includes stepping up the interest rate and sucking out the excess liquidity in the financial system. The severity of the tightening will ultimately depend on two factors: one, whether the countries where the inflation numbers are far away from the target move quickly and two, whether the CBs enjoy credibility in those countries so that they may get away with a milder reaction due to such tightening. 

In the RBI’s case, of course, the knee-jerk reaction prompted an off-cycle MPC hike of 40 bps on May 4, ’22 followed by another 50 bps on June 8, 2022. These hikes have triggered the back-to-back readjustment of rates in the economy, the first fall out being the re-pricing of the bank credit both to the retail as well as the corporate borrower.  On the other end of the spectrum, we have the pensioners who survive on the periodic interest on their deposits. Due to tightening of money supply, banks and FIs have re-calibrated the deposit rates and the pensioners are now a lot happier. The bond yields also went higher, riding the wave of repo rate cuts. During this period the 10-year G Sec paper, a bellwether for the market, also firmed up by about 70 bps. This may have a larger impact on the government borrowing for FY 23 which is pegged at `14.31 lakh crore out of which ₹8.45 lakh crore is planned to be borrowed in the first half (H1).

Apr. 1

Apr. 8

Apr. 15

Apr. 22

Apr. 29

May 6

May 13

May 20

May 27

Jun. 3

Jun. 10












10 year G Sec yield movement Source RBI database

Another segment of the economy that is also getting swayed by the higher inflation and consequent re adjustment of rates, is the capital market. The overheated commodity prices, especially international crude, due to the geo political factors, had turned the foreign institutional investor (FII) a net seller over several months. Between October ’21 and May ’22 they offloaded about `2.06 lakh crore worth of stocks. Additionally, the recent action of the US Fed hiking the basic interest rate by 75 bps on June 15 to curb the inflation in the US economy, had acted as the multiplier to the flight of the FIIs.  

The shape of things to come by is not very easy to predict. As for RBI, the obvious choice will be, as views expressed by Fitch Ratings, to hike the repo rate to 5.9% by December ’22 to reign the upward trend in inflation number. In its Global Economic Outlook, Fitch viewed “Given the deteriorating outlook for inflation, we now expect the RBI to lift rates further to 5.9% by December and to 6.15% by the end of 2023 (vs previous forecast of 5%) and to be unchanged in 2024.”

In the meanwhile, the social tug of war of inflation continues. It remains to be seen how the MPC handles the turbulence and offers the economy its desired level of stability.


(Author works for Peerless Financial Services Ltd.  Views expressed are his personal)




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