RBI MPC meet: 50-bps rate hike looks imminent, growth forecast likely to be cut

The Reserve Bank of India’s (RBI) Monetary Policy Committee began its three-day meeting on Wednesday with expectations that it will deliver a 50-basis point hike in the key interest repo rate on Friday to tame inflation penetrating deep in the economy.

Not only that, the central bank is also expected to cut economic growth estimate moderately from its earlier 7.2 per cent forecast as its inflation fight is sure to slow down the economy going forward.

The monetary policy decisions will be announced on Friday

Data shows core inflation (excluding food and fuel) remained above 6 per cent till last month, which means inflation is slowly getting entrenched and it is not only due to seasonal factors. But the prime concern is that the fight to check inflation may stagnate economic growth. Consumers will buy less goods and services as borrowing from banks will become costlier.

The RBI has resorted to interest rate hikes since May this year. The current repo rate stands at 5.40 per cent. The RBI had cut interest rates to as low as 4 per cent when the Covid pandemic hit in 2020.

"The domestic economy is in the initial stages of recovery. It is crucial to support the strength of domestic demand, which has already seen some impact as reflected in reduced GDP growth expectations for the current fiscal. In this light, any significant rate hike will serve as a dampener to the economic momentum..,” said Shishir Baijal, Chairman and MD of property consultancy firm Knight Frank.

However, Anuj Puri, the Chairman of another property consultancy group ANAROCK believes a 50-bps hike should not deter homebuyers’ sentiment. "A degree of discomfort notwithstanding, a 50-bps hike should not seriously hamper homebuyers’ sentiments. Moreover, the festive season is around the corner. This is a period when developers usually roll out various freebies and offers, and we may even see fixed interest rate guarantee plans announced this year,” Puri said.

Meanwhile, if the September inflation print also comes above the RBI’s upper tolerance band of 6 per cent, it would face scrutiny as to why it failed in its prime objective to control inflation below 6 per cent.

“Economic growth will be unintendedly adversely impacted by consecutive rate hikes in a short period of time, even though they are necessary to combat inflation…. Goods and services will no longer be affordable to poor segment of society. Everything will get more expensive. India could also face stagnation by the end of next fiscal year if the growth-inflation situation does not improve,” said SAG Infotech MD Amit Gupta.