The Reserve Bank of India (RBI) raised the benchmark repurchase rate by a widely anticipated quarter point to 6.50%, keeping its monetary policy focused on taming sticky core inflation, a measure that strips out volatile items such as food and fuel costs.
By resorting to a slower pace of hike, the RBI’s monetary policy committee has kept room for itself to further tighten borrowing costs and act more aggressively in the future to bring down stubbornly high core inflation, which is its main concern for now.
The RBI had first raised rates by 40 basis points at a surprise meeting in May, followed by 50 basis points each in June, August and September. It raised rates by a further 35 basis points in December last year. One basis point is one hundredth of a percentage point.
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“The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” a monetary policy committee (MPC) resolution released on Tuesday said.
Central banks typically raise the repo rate – the interest rate at which commercial banks borrow money by selling their securities to the Reserve Bank – to shrink money supply in the economy.
Lower interest rates make for easy borrowing and businesses typically borrow to invest in new economic activities. Therefore, more cash supply increases inflation because more money chases fewer goods, since money supply can be increased overnight, but not purchasable goods, which need considerable time to produce.
Since the interest rate at which banks borrow will now go up, retail loans such as personal loans, auto loan, home loan may get costlier. So, new borrowers should expect EMIs to go up.
The standing deposit facility rate, pegged 25 basis points below the repo rate, was adjusted to 6.25%. The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 6.75%.
On the flip side, bank depositors will get higher returns on their deposits depending on how banks pass on the new interest rate hike. These deposits include fixed deposits.
“Taking into account these factors and assuming an average crude oil price (Indian basket) of US$ 95 per barrel, inflation is projected at 6.5% in 2022-23, with Q4 at 5.7%. On the assumption of a normal monsoon, CPI inflation is projected at 5.3% for 2023-24, with Q1 at 5%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.6%, and risks evenly balanced,” the MPC statement said.
The “MPC will continue to maintain strong vigil on inflation,” RBI Governor Shaktikanta Das said in a livestreamed address from Mumbai on Wednesday. The idea is to keep inflation expectations anchored (or addressed) and “break the persistence of core inflation”, he said.
Core inflation still remains too high for the RBI’s comfort. While headline consumer prices have settled within the central bank’s 2%-6% target band, the core inflation, which is overall inflation minus price rise in volatile food and fuel costs, has stayed above 6% for the past 15 months.
The RBI forecast inflation to average at 5.3% during FY24, from a revised 6.5% in the current fiscal year. It forecast economic growth at 6.4% against 6.8% seen in current year ending March.