The RBI, in a meeting on June 8, 2022, raised the repo rate by 50 basis points to 4.90% citing rising inflation.
While the RBI has been maintaining an accommodative stance for more than a year, the RBI wants to focus more on gradually withdrawing from the stance “to ensure that inflation remains within the target going forward, while supporting growth..”
The RBI tried to maintain an inflation rate of 4% with a +/- 2% band around the target.
An accommodative stance refers to the act of the central bank extending the supply of funds to support economic growth.
During the period the RBI assumes an accommodative stance, the interest rates are kept in control to boost lending, and the possibility of an interest rate hike is ruled out. However, rising inflation concerns has led the RBI to steadily move towards withdrawing from the accommodative stance.
RBI stance on inflation
RBI expects inflation rate in India to be above RBI's upper band of 6% for the first three quarters of the financial year 2022-23. According to the RBI, inflation for FY 22-23 could be around 6.7%. During the current quarter, that is April to June 2022, inflation is expected around 7.5% and at 7.4% during July to September 2022.
Food inflation pressures will continue to create shocks even when the government is trying to control increasing costs and supply side pressures in various sectors, according to the RBI.
Citing specific consumer goods like petroleum wherein reduction in excise duties has moderately reduced prices but international crude oil levels remain to be under pressure. There is also higher risk in electricity prices and food prices because of the heatwave and unfavourable weather conditions.
Hence it decided to increase the repo rate to keep inflation under control.
RBI's stance on growth
Even though inflation is only expected to go upwards from here, RBi expects rural and urban consumption to improve as domestic economic activity is seeing an uptick. Rising exports may help in maintaining some economic activity. Taking these factors in mind, RBI expects a growth of 7.2% in GDP during FY22-23.
Increase credit in housing sector: To increase the flow of credit to the housing sector, RBI has extended the loans extended by urban and rural cooperative banks. The limits have been increase by more than 100%. A revision has been done after a decade. RBI has implemented a couple of measures to empower cooperative banks to be able to provide more loans in the housing sector.
Rupay credit cards-UPI linking: Rupay credit cards can now be linked to UPI platforms. This has been done to widen the scope of digital payments.
e-mandates for recurring payments: The e-mandate limit has been hiked to Rs 15,000. We use many merchants like our OTT platforms or news subscriptions where we are required to give recurring payments. More often than not, such recurring payments are automated. Recently the RBI had made an e-mandate mandatory for such standing instructiins for recurring payments. Through such a mandate, we are required to give consent to such merchant platforms that they can debit money from our debit/credit cards.
The limit requiring an e-mandate has been increased to Rs 15,000 from 5,000.