The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) has decided to increase the repo rate by 25 basis points to 6.50%, the highest level in four years. This is the sixth consecutive increase in policy rates in less than a year and the cumulative increase in the policy rates since May 2022 stands at 250 bps or 2.50 per cent. This hike in repo rate will lead to a hike in the cost of borrowing for all types of loans, negatively impacting demands, but will bring cheers to fixed deposit investors, notably senior citizens and pensioners who rely heavily on interest earnings.
RBI Governor Shaktikanta Das noted that the world economy is not looking so grim anymore and that inflation also appears to be coming down. The RBI has projected India’s GDP growth at 6.4 per cent for 2023-24, with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6% and Q4 at 5.8%, and risks broadly balanced. The Central bank has estimated that retail inflation will be 6.5 percent for the 2022-23 fiscal year and 5.3 percent for the following fiscal year.
The RBI Governor said that the “world economy does not look so grim now”, and the inflation has been coming down. Nevertheless, he is wary of core inflation. He stated that there are still considerable doubts regarding the potential trend of global commodity prices, such as the cost of crude oil. Prices may stay strong as restrictions due to Covid-19 are being eased in some parts of the world. The transmission of input costs, especially in services, could keep core inflation at elevated levels.
The Monetary Policy Committee (MPC) made the decision to keep a close eye on inflation, which is expected to stay above the 6% comfort level in this financial year, but will decrease to 5.3% in the next. Considering multiple elements and with an estimated average crude oil price (Indian basket) at US$ 95 per barrel, Mr. Das predicted that inflation will be 6.5% in 2022-23, with the fourth quarter at 5.7%.
The hike in repo rate will have an impact on the real estate sector and various banking activities. Higher borrowing costs could reduce demand for home loans and slow down the real estate market, but higher returns on fixed deposits could encourage investment in property.
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