New Delhi: The Reserve Bank of India is expected to pause the interest rate hike after today’s hike of 25 basis points, said a senior economist while speaking to ETV Bharat on Wednesday, adding that given the inflation scenario, the Central bank may not reduce the interest rate either unless there is an adverse impact on the economic growth and in such a situation, the policy rates are expected to remain at the current level in foreseeable future.
In its first monetary policy meeting of the current year, the Reserve Bank Governor Shaktikanta Das announced a 25 basis points (a quarter of a percent) hike in the benchmark interbank lending rate, the repo rate. Repo rate is the rate at which banks borrow short term funds from the Reserve Bank while at the Reverse Repo rate, the banks park their surplus funds with the RBI.
As a result repo rate now stands at 6.50 percent, the standing deposit facility at 6.25 percent, and the marginal standing facility at 6.75 percent. Any change in the repo and reverse repo rates have a direct bearing on the interest rates prevailing in the economy such as the interest rates for the loans raised by the business, corporate, small and medium enterprises. Similarly, any movement in the repo rate and reverse repo rates also has a direct impact on the retail loans taken by the borrowers such as home loans, auto loans, and personal loans among others.
If one takes into account the total rate hike since May last year then the Reserve Bank of India has raised the repo rate by 2.5 per cent since May last year when it reversed the cycle of low interest rates that was announced in the wake of the COVID-19 pandemic. With today’s hike of 25 basis points, the repo rate is at its highest since February 2019.
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RBI Governor said that the retail inflation was likely to remain above four per cent in the next financial year due to geopolitical factors. Crude oil and other non-crude oil prices are at elevated level since the outbreak of ongoing Russia-Ukraine war that started in February last year but has shown no sign of a resolution in foreseeable future even after a year-long incessant fighting.
Sunil Sinha, the Principal Economist at India Ratings and Research said that as the RBI expects retail inflation to average 5.3 per cent in FY24, higher than the target rate of 4 per cent, the agency believed that might not raise the policy rate but will also not think of reducing it any time soon. “This means the policy rate will remain at the current level at least in the foreseeable future, unless there is any adverse shock to the economy, and the real rate of interest will remain positive,” Sinha told ETV Bharat.
In other words, the borrowers can expect a stable interest regime for the foreseeable future as the interest rates will remain within a predictable range unless there is a major shock to the economy. Though economists expect a stable interest rate regime in the foreseeable future without any likelihood of increase or reduction in absence of a major change in the economic environment, some of them do not share the Reserve Bank’s projection of India’s GDP growth for the next financial year.
In its monetary policy statement, Shaktikanta Das has projected the country’s GDP growth to be 6.4 per cent in FY 23-24. “Given that GDP growth is expected to drop to 4.5 per cent in 2HFY23 (Oct 2022-March 2023) as per NSO’s advanced estimate and the India economy is going to face headwinds from global growth slowdown and tighter financial conditions, India Ratings believes this to be an optimistic assessment,” noted Sunil Sinha.
