Repo rate hike

The hike in the repo rate by 25 basis points to 6.5 per cent by the Reserve Bank of India (RBI) to tame inflation is in sync with the broad market consensus. Inflation forecasts still appear high amid the resilient growth projections. That may explain the central bank’s relatively cautious overall messaging with its sixth successive repo rate hike in the current financial year. Governor Shaktikanta Das has given enough hints that inflationary pressures are easing without refusing to commit that the inflation battle is over. He has left the door open for future rate hikes, much against expectations. A rate cut is not on the horizon. While economic activity in India is expected to hold up well and inflation could moderate in 2023-24, it is likely to rule above the 4 per cent target. Consumer price inflation has moved below the upper tolerance band of 6 per cent but core inflation remains sticky. Geopolitical tension and volatile crude oil prices could play a spoiler.

Home loans and other borrowings are set to get more expensive as almost all the floating rate loans are linked to the RBI’s repo rate, which is the rate at which it lends to banks. The key benchmark lending rate has risen significantly by 250 basis points since May last year. Continuously rising interest rates have come as a setback for borrowers. EMIs can come down only once inflation moderates, and that could take time. On a positive note, depositors can expect higher returns as the banks will have more headroom for better offers without sacrificing their margins.

The RBI’s objective of achieving durable disinflation is still some distance away. It has forecast slower economic growth of 6.4 per during the next fiscal, assuming a normal and good monsoon season, as compared to the estimation of 7 per cent during the current fiscal.