The repo rate was raised to 6.25 percent by the Reserve Bank of India (RBI) on December 7. The six-member Monetary Policy Committee (MPC) of the RBI voted 5-1 to adopt the decision. The repo rate determines how much money banks can borrow from the central bank. The RBI also agreed to keep its accommodative policy in place, thus the MPC may raise rates again in February 2023 before taking a break from doing so.
Moreover, the RBI decreased the country’s growth rate estimates for 2022–23 from the 7% it had projected to 6.8% after accounting for various external growth headwinds, most notably the ongoing Ukraine war. This was in line with the majority of agencies that revised growth estimates downward.
It was widely anticipated that the RBI would refrain from raising the repo rate by 50%, as it had previously done on three separate occasions. The Consumer Price Index (CPI), which measures headline inflation, has slowed to 6.8% in October. At the same time, inflation was still a possibility, necessitating higher interest rates in order to reduce consumer spending. Consequently, it was decided to raise rates by 35 basis points.
The RBI may raise rates by an additional 25 basis points before pausing rate increases to allow for more economic growth, especially given that recession is looming over many developed nations at the time the MPC meets to review monetary policy in February.
The RBI started raising the repo rate as high inflation posed a threat after cutting rates during the pandemic to encourage growth after the country’s economy was severely shaken by the lockdowns. Following Russia’s invasion of Ukraine in February 2022, the majority of central banks around the world had also turned to interest rate increases to curb inflation. Prior to the most recent increase, the central bank had increased repo rates four times in a row, the previous three increases totaling 50 basis points.
Shaktikanta Das, governor of the RBI, gave the following justification for refraining from implementing another 50-basis-point hike: “For the Indian economy, the outlook is supported by good progress of rabi sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, rebound in services, and robust credit expansion.” Even though CPI inflation had slowed down, according to Das, it was still higher than the target’s upper tolerance band of 6%.
According to Das, core inflation—the increase in prices for items other than food and fuel—is showing signs of stickiness. “While headline inflation may decline over the course of the year and in the first quarter of 2023–2024, it is still anticipated to exceed the target. Geopolitical tensions, financial market volatility, and an increase in weather-related disruptions all pose increased risks to the medium-term inflation outlook, he said.
According to economists, the RBI would keep up its war against inflation. The fight against inflation is far from over because persistent core inflation keeps pushing up headline inflation. The purpose of today’s rate increase (December 7) was to end the persistence of core inflation, according to D.K. Joshi, chief economist at Crisil. He stated that the RBI will closely watch the effects of its recent rate hikes on core inflation and domestic demand as well as the actions of other systemically important central banks like the US Federal Reserve between now and the next policy. That being said, Joshi continues, “expect the RBI to act if excessive inflation persists.”
The policy decision in February 2023 will likely fall somewhere between a pause and a final 25 basis point hike, according to Suvodeep Rakshit, senior economist at Kotak Institutional Equities, “with a bias towards a hike given that near-term inflation readings are likely to remain relatively elevated around 5.5 percent.”
Commercial banks will raise their lending rates as a result of the rate increase. Interest rates on mortgages, which have already been rising, are likely to increase higher. “However, the impact on housing will at best be moderate as long as interest rates remain in single digits (primarily within 9.5%),” said Anuj Puri, chairman of the Anarock Group, a provider of real estate services. We will witness significant pressure on residential sales volumes in the upcoming months, particularly in the affordable and lower middle-range housing segments, if they cross this threshold.
The housing sector’s performance in the third quarter of this fiscal year validated Puri’s claim that the impact of the last four consecutive rate increases this year was minimal. After the three most recent rate hikes, as many as 88,230 units were sold in the top seven cities during the third quarter of 2022, he claimed.