Surinder Sharma
Inflation is expected to rise further, and borrowing from banks could also become more expensive. The Reserve Bank of India (RBI) has raised the repo rate from 5.25% to 5.50%, marking the first rate hike since February 2023, nearly four years after the last increase.
So, what exactly is the repo rate?
The repo rate is the interest rate at which banks borrow money from the RBI. The basic formula is simple: if the RBI lends money to banks at a higher rate, banks are likely to make loans more expensive for customers. Higher borrowing costs can reduce demand for loans and overall spending, which in turn can help control inflation.
The RBI has projected that the inflation rate could rise from 5.0% to 5.2% this year. However, there is some positive news on the economic front, with the central bank projecting GDP growth at 7.1% for the year.
The RBI’s Monetary Policy Committee (MPC) held a three-day meeting, after which Governor Sanjay Malhotra announced the new interest rates on October 7. He also indicated that while the repo rate could rise further in the coming months, a rate cut is unlikely for now.
Rate Cuts Off the Table for Now
The RBI has changed its policy stance to “calibrated tightening.” This indicates that the possibility of interest-rate cuts has effectively been put on hold for the time being.
In upcoming policy meetings, the RBI is likely to either keep interest rates unchanged or raise them further if inflationary pressures warrant such action.
Religare Broking’s Ajit Mishra said the 25-basis-point hike was largely in line with expectations, but the more important development was the change in the policy stance. According to him, the move clearly signals that controlling inflation has now become the RBI’s top priority.
Upasana Bharadwaj, Chief Economist at Kotak Mahindra Bank, believes interest rates could be raised by another 25 to 50 basis points in the coming period.
Meanwhile, Radhika Rao, Senior Economist at DBS Bank, said the change in stance shows that the RBI wants to prevent inflation risks from becoming deeply entrenched in the economy.
The latest move means consumers and businesses may have to prepare for a period of higher borrowing costs, while the RBI keeps its focus firmly on containing inflation.
