Editorial: Growth weighs on RBI
The pause in the policy rate hike must be seen as a pragmatic move given the global uncertainty
Hyderabad: By keeping the repo rate unchanged, the Reserve Bank of India (RBI) has clearly weighed on the side of growth, instead of continuing to be tough on targeting inflation. After a spree of interest rate increases by a cumulative 250 basis points in the last 11 months, the central bank, in its latest Monetary Policy Committee (MPC) meeting, opted for pausing the rate hike. This comes amidst uncertainty plaguing the economic outlook due to the crisis in the global banking sector. The six-member MPC voted unanimously to keep the repo rate – the rate at which the central bank lends money to commercial banks and financial institutions – unchanged at 6.50%. At a time when most economists expected another dose of a policy rate hike to tame inflation, this decision came as a major relief for home buyers and the real estate industry. The pause in the policy rate hike must be seen as a pragmatic move. Low rates encourage people to invest in big-ticket purchases. They take loans for homes and vehicles because EMIs look affordable. This results in an overall rise in demand for goods in the economy. Businesses respond by increasing their production and borrowing money to buy new machines and expand their shop floors and offices. Continuously rising interest rates in the recent past was seen as a setback for borrowers. As a general rule, when RBI is more concerned about containing inflation it raises interest rates, thereby depressing economic activity, and when it wants to stimulate growth it brings down the interest rates.
At 6.44%, the inflation in February was slightly above the upper limit of RBI’s tolerance band which is set at 6%. However, the central bank expects it to come down to 5.2% for the financial year 2023-24. On the growth front, the RBI has marginally increased its growth forecast for the year from 6.4% to 6.5%. However, the probable headwinds to this estimation are geopolitical tensions and turbulence in the global financial market. Recent developments in the US and European banks have sent shock waves through the global financial system, raising fears of a possible 2008-style global financial crisis. But, the Indian banking system, with strong capital and liquidity positions and improved profitability, is healthy enough to be largely insulated from external shocks. For the working class sections of the country, who pay both for inflation and for inflation-curbing policies, the pause in rate hike might be a temporary reprieve. If prices continue to rise, the central bank might return to a more hawkish stance of raising interest rates. In this globalised world, the RBI has no option but to follow what more powerful central banks in developed countries do. Its objective of achieving durable disinflation is still some distance away. It has forecast a growth of 6.5%. assuming a normal and good monsoon season.
