As the RBI announces the sixth consecutive increase in lending rates, loan EMIs may increase.
The majority of economists anticipated that the boost on Wednesday would mark the end of the RBI’s current tightening cycle, which has seen rates raised by 250 basis points since May of last year.
On Wednesday, the Reserve Bank of India increased its benchmark repo rate by a quarter percentage point as anticipated, but startled the markets by suggesting there was still room for further tightening because core inflation was still high.
Four out of the six members of the central bank voted in favour of maintaining its policy stance of the withdrawal of accommodation, according to the central bank.
The majority of analysts anticipated that the RBI’s rate increase on Wednesday would be the last one in its current tightening cycle, which has seen rates increased by 250 bps since May of last year.
The primary lending rate, or repo rate, was raised to 6.50% by the monetary policy committee (MPC), which consists of three members from the central bank and three external members.
Six members were present, and four voted in favour of the motion.
“It is problematic that core or underlying inflation is so persistent. We require a clear moderation in inflation. We must remain steadfast in our resolve to reducing inflation “In announcing the committee’s choice, RBI Governor Shaktikanta Das remarked.
Further calibrated monetary policy action is necessary, according to Das, even if the effects of past rate hikes are still being felt by the economy.
In a survey done before to the federal budget on February 1, 40 out of 52 analysts predicted that the RBI will increase the repo rate by 25 basis points. The other 12 forecasted no change.
According to Das, despite being lower than it was during the pandemic, the actual interest rate after accounting for inflation is still below pre-pandemic levels, and liquidity is still abundant.
Following pandemic-related assistance measures, the RBI reduced the liquidity surplus in the banking system from roughly 9 to 10 trillion rupees to under 2 trillion rupees ($24.19 billion).
As consumer prices cools and their economies’ growth shows signs of slowing, an increasing number of central banks around the world have signalled a pause or end to their tightening in recent weeks.
The RBI’s upper tolerance zone of 2%–6% was breached once again by India’s annual retail inflation rate in December, which dropped to 5.72% from 5.88% the month before. However, core inflation, which includes more volatile food and fuel costs, was still running at 6.1%.
According to projections, consumer inflation will be 6.5% in the fiscal year 2023 and 5.3% in the fiscal year 2024.
“We can’t rule out future rate hikes,” analysts at ING wrote in a note, “unless (certain) gauges of inflation present less of a danger, by falling below 6% and remaining there for a few of months.”
Consequently, we will be updating our projections and adding another 25 bps, bringing the peak policy rates following this most recent hike to 6.75% and delaying the timing of potential rate decreases until next year.
Another 25 bps rate hike is definitely possible in April, according to Capital Economics, although much will depend on the inflation estimates for January and February.
Even while there are still significant concerns around the price of commodities globally, Das continued, the Indian economy appears resilient. For FY24, the RBI expects growth to be at a 6.4% annualised rate.
“Compared to a few months ago, the outlook for the global economy is not as bleak. While inflation is declining but still considerably above target in major economies, growth prospects in those economies have improved. The situation is still unstable and unknown,” said Das.
Prior to the policy announcement, the Indian rupee was barely altered to the U.S. dollar, trading at 82.69 as opposed to 82.67. After the RBI maintained its withdrawal of accommodation posture, it momentarily increased to 82.62.
The benchmark bond yield was 7.3391 percent, down from 7.3124% before the policy announcement and 7.3102% at the previous closing.
As of 11:39 a.m. IST, the S&P BSE Sensex was up 0.69% at 60,701.39 and the Nifty 50 index was up 0.78% at 17,860.50.