Given global uncertainties, a pause in rate hikes must be seen as a pragmatic move
Post Date – 12:15 AM, Saturday – 4/8/23
Given global uncertainties, a pause in rate hikes must be seen as a pragmatic move
Hyderabad: By keeping the repo rate unchanged, the Reserve Bank of India (RBI) is clearly positive for growth, rather than continuing to be hawkish on its inflation target. The central bank opted to pause rate hikes at its latest Monetary Policy Committee (MPC) meeting after raising rates by a cumulative 250 basis points over the past 11 months. The economic outlook is uncertain due to the global banking crisis. The six-member Monetary Policy Committee voted unanimously to keep the repo rate (the rate at which the central bank lends to commercial banks and financial institutions) unchanged at 6.50%. The decision comes as a relief to homebuyers and the housing industry at a time when most economists expect another rate hike to curb inflation. A pause in policy rate hikes must be seen as a pragmatic move. Low interest rates encourage people to invest in big-ticket purchases. They take out home and vehicle loans because EMI looks affordable. This leads to an overall increase in the demand for goods in the economy. Businesses have responded by increasing production and borrowing money to buy new machinery and expand workshops and offices. The recent sustained rise in interest rates is seen as a setback for borrowers. As a general rule, when the RBI is more concerned with curbing inflation, it raises interest rates, thereby dampening economic activity, and when it wants to stimulate growth, it lowers rates.
Inflation stood at 6.44% in February, just above the upper end of the 6% tolerance band set by the Reserve Bank of India. However, the central bank expects it to drop to 5.2% in the 2023-24 financial year. On the growth front, the RBI slightly raised its growth forecast for this year to 6.5% from 6.4%. Potential headwinds to this estimate, however, are geopolitical tensions and turmoil in global financial markets. Recent developments in US and European banks have sent shockwaves through the global financial system, stoking fears of a possible 2008-style global financial crisis. However, India’s banking system has strong capital and liquidity positions, and improved profitability, enough to be largely insulated from external shocks. For working Americans who are paying for both inflation and disinflationary policies, the pause in rate hikes may prove to be only a temporary reprieve. If prices continue to rise, the central bank may return to a more hawkish rate-hiking stance. In this globalized world, the RBI has no choice but to emulate what the more powerful central banks of the developed world have done. Its goal of lasting deflation is still some way off. It forecast growth of 6.5%. Assume the monsoon season is normal and good.
