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RBI Raises Repo Rate By 25 Bps To 6.50% Amid Moderating Inflation
The smaller rate hike by the central bank can be credited to moderating retail inflation and the United States (US) Federal Reserve softening the pace of the hike in its benchmark interest rate
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The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday raised the policy rate by 25 basis points in its last policy review of the fiscal year amid moderating inflation.
The MPC hiked the repo rate, or the key rate to 6.50 per cent from 6.25 per cent and increased the key rate by 250 (225 + 50) bps since May. The panel also decided to remain focused on the withdrawal of the accommodative stance.
The smaller rate hike by the central bank can be credited to moderating retail inflation and the United States (US) Federal Reserve softening the pace of the hike in its benchmark interest rate.
In December 2022, RBI raised the key repo rate by 35 basis points (bps). The MPC, comprising three members from the RBI and three external members, raised the key lending rate or the repo rate (INREPO=ECI) to 6.25 per cent in a majority decision.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said, "The RBI as expected hiked repo rate by 25 bps. The split mandate of 4-2 was also as expected. The stance too was unchanged which is in line with the excess liquidity continuing to be tightened."
He addrd that we see the RBI remaining concerned on inflation, especially core inflation. We expect inflation to average around 5.2 per cent in FY2024 with adverse risks to growth likely to increase.
The RBI will likely become increasingly data dependant and look at the impact of the past rate hikes on inflation-growth dynamics. We expect the RBI to pause from the next policy onwards with a likely shift in stance to neutral as the liquidity tightens further over March-April."
Jyoti Prakash Gadia, Managing Director, Resurgent India said, "The persisting uncertainties and volatile global scenario have prompted the RBI to revise downward the next year's GDP growth rate to 6.4 per cent which is however still well comparable with peers. The stock market is expected to respond positively to the measures announced by RBI, with the underlying resilience of the economy being at the forefront."
Gadia added that the banking sector is also expected to respond positively with healthy credit growth and a positive real rate of interest to the depositors. Overall a pragmatic approach was adopted by RBI with the intent to have an immediate focus on inflation while supporting growth in the medium term.
Anant Singhania, President, IMC Chamber of Commerce and Industry said, "Rate hike of 25 basis points was in lines with IMC expectations considering various factors like banks reporting strong credit growth indicating enough liquidity and the RBI’s resolute focus on inflation management which is still hovering at 5.72 per cent. QR code based coin vending machines in select cities to begin with and extending UPI payment facility to travelers into India from G-20 countries are innovative measures which will further boost ease of living."
S Ravi, Former Chairman of BSE said, "RBI increasing the repo rate by 25 bps to 6.5 per cent is in line with what other central banks are doing as well as the market expectations in view of certain indicator pointing out that inflation has begun to ease."
However, RBI will continuously monitor the trends and may increase the repo rate by a few basis points in the next few months to achieve the targeted inflation of 5.3 per cent in FY 2024, Ravi stated.
This repo rate hike is likely to make the business loans costlier as well as the retail consumer loan products including the home loans. This will result in borrowers paying more towards the EMI and extending the tenor of the loan.
On the other hand, the rate hikes may push individuals to invest their money in fixed deposits as banks and NBFCs are providing attractive interest rates. This in turn will provide a check on the consumption demand, he mentioned.