Editorial: RBI remains cautious

Rate hike comes as a warning to the government that the economy is still not entirely out of the woods.

Hyderabad: Despite the lofty claims of the Centre about the pace of economic recovery, inflation continues to be a cause for major concern. The Reserve Bank of India’s latest decision to hike the policy rate mirrors this concern and comes as a warning to the government that the economy is still not entirely out of the woods. The RBI’s Monetary Policy Committee has raised the repo rate, the sixth successive hike in the current financial year, by 25 basis points to 6.5% to tame inflation. This shows that the inflation forecasts are still high. Governor Shaktikanta Das has left the door open for future rate hikes, much against expectations. A rate cut is not on the horizon, at least in the immediate future. The reason the central bank has stuck to the hawkish stance is because of its outlook for India’s economic growth and inflation in 2023-24. It expects the GDP to grow 6.4%, but the growth rate to slow in every successive quarter through the year; and for retail inflation to not fall below 5% in any quarter. As a general rule, when the 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. While economic activity in India is expected to hold up reasonably well in the midst of global headwinds and inflation could moderate in 2023-24, it is still likely to rule above the 4% target. Consumer price inflation has moved below the upper tolerance band of 6% but core inflation remains sticky.

Geopolitical tension and volatile crude oil prices could also play a spoiler in the days ahead. The immediate impact of the rate hike is that home loans and other borrowings will 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 when inflation moderates, and that could take some more time. However, on a positive note, depositors can expect higher returns as banks will have more headroom for better offers without sacrificing their profit margins. The central bank’s objective of achieving durable disinflation is still some distance away. It has forecast slower economic growth of 6.4% during the next fiscal, assuming a normal and good monsoon season, as compared with the estimation of 7% during the current fiscal, as risks continue to emanate from protracted geopolitical tensions, global slowdown and tightening of global financial conditions. A bigger worry for the RBI continues to be the core inflation rate which has been hovering around 6%.

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