The Reserve Bank of India (RBI) hiked its key interest rate, the repo rate, by 25 basis points on Wednesday and lowered its growth and inflation projections.
The repo rate is the interest banks pay to borrow from the central bank, and an increase in that rate makes banks raise their lending charges.
The latest is the sixth consecutive rate hike, taking the RBI’s key rate to 6.50 per cent.
In all, the RBI has raised the benchmark rate by 2.5 per cent since May last year in its fight against inflation, which stayed above the higher end of the central bank’s target of 2-6 per cent in 10 of the 12 months last year.
The central bank had to send a mandatory report to the government explaining why it could not meet its inflation target for most months last year.
What does the RBI rate hike mean?
Indian banks are certain to pass on the latest hike to customers almost immediately, as seen in recent months.
That will make loans costlier and lead to higher equated monthly instalments (EMIs).
All consumer loans have become costlier over the past year.
Indian households continue to be under pressure from mounting interest and rising EMIs even as they struggle to manage their monthly budgets from rising prices of almost everything.
The series of relatively large RBI rate hikes have sparked concerns that the battle against inflation could also risk curbing economic growth.
That view has forced several top institutions, including the RBI, to downgrade their India GDP growth forecasts for 2023-24.
But RBI Governor Shaktikanta Das said the Indian economy remains resilient and is seen as a bright spot in a gloomy world.
He also warned inflation is sticky and likely to remain above the central bank’s target of 4 per cent this year, and as such, caution is needed.
Still, slowing growth concerns have driven expectations that the RBI’s hands will be forced to pause rate hikes at some point soon.
A Reuters poll taken before Wednesday’s decision showed post the latest hike, India’s central bank will pause on interest rates.
But the central bank’s tone suggests otherwise, with the RBI Governor opening the door for more hikes.
Like other major central banks, the RBI is waiting for stubbornly high inflation to ease further before it moves away from an aggressive approach.
What is not helping is the reason for the global inflation surge over the past year – the disruptions to global supply chains because of the Russia-Ukraine war.
That war on the edge of Europe shows no signs of abating, and instead, the standoff now seems to be escalating further.
That will keep global central banks on their toes.
(With inputs from agencies)
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