Loan EMIs To Go Up As Repo Rate Hiked By 25 Bps To 6.5%

The RBI has brought down the liquidity surplus in the banking system to below 2 trillion rupees ($24.19 billion) from around 9-10 trillion rupees..

RBI Governor Shaktikanta Das

RBI Governor Shaktikanta Das

Governor Shaktikanta Das announced the decision of the monetary policy committee on Wednesday. The Reserve Bank of India hiked its key repo rate by a quarter percentage point as expected but surprised markets by leaving the door open to more tightening, saying core inflation remained high.

A growing number of central banks around the world have signaled a pause or halt in their tightening in recent weeks as consumer inflation comes off the boil and growth in their economies shows signs of softening.

The Indian rupee was little changed to the US dollar at 82.69 compared with 82.67 prior to the policy announcement. It briefly rose to 82.62 after RBI maintained its withdrawal of accommodation stance.

The central bank said that its policy stance remains focused on the withdrawal of accommodation, with four out of six members voting in favor of that position.

The monetary policy committee (MPC), comprising three members from the central bank and three external members, raised the key lending rate or the repo rate to 6.50%, also in a split decision. Four of the six members voted in favor of the move.

RBI Governor Shaktikanta Das announces monetary policy

“The stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation,” RBI Governor Shaktikanta Das said while announcing the committee’s decision.

While the effect of earlier rate hikes is still working its way through the economy, further calibrated monetary policy action is warranted, Das added.

In a poll conducted ahead of the federal budget on 1 February 2023, more than three-quarters of economists, 40 of 52, had expected the RBI to raise the repo rate by 25 bps. The remaining 12 predicted no change.

RBI Governor said that the inflation-adjusted, real interest rate remains below pre-pandemic levels and liquidity remains surplus, even though it is lower than during the pandemic.

The RBI has brought down the liquidity surplus in the banking system to below 2 trillion rupees ($24.19 billion) from around 9-10 trillion rupees in the aftermath of pandemic-related support measures.

Inflation rate in India

India’s annual retail inflation rate eased to 5.72% in December from 5.88% in the previous month, falling below the RBI’s upper tolerance band of 2%-6% for a second straight month, though core inflation, which excludes more volatile food and fuel prices, was still running at 6.1%.

Consumer inflation is projected to be at 6.5% in the fiscal year 2023 and 5.3% for the fiscal year 2024.

Das added that the Indian economy looks resilient even though considerable uncertainties remain on global commodity prices. The RBI has projected a growth rate of 6.4% for FY24.

“The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent though still remains well above target in major economies. The situation remains fluid and uncertain,” RBI Governor said.

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