RBI hikes repo rate to pre-pandemic levels

The Reserve Bank of India raised its benchmark lending rate by half a percentage point to 5.40 per cent on Friday, marking the third such increase in a row in a bid to fight persistent inflation in Asia's No.3 economy.

The decision, which came after inflation stayed above the central bank's tolerance band for six straight months, will make home, auto and other personal loans costlier. It also made many worry about a potential decline in consumer demand. Through Friday’s action, the RBI returned borrowing costs to pre-pandemic levels. The fresh benchmark repurchase rate of 5.40 per cent was last seen in August 2019.

Inflation remained at an “unacceptably and uncomfortably high level” of 7 per cent, RBI Governor Shaktikanta Das said in a press conference. The hawkish stance sent bond yields and the rupee higher.

Despite the inflation staying above its upper tolerance limit of 6 per cent for the last six months, the central bank maintained its growth and retail inflation forecast for FY23 at 7.2 per cent and 6.7 per cent respectively.

Some economists found the unchanged GDP forecast perplexing, considering the aggressive rate hikes since April 2022.

“How will higher interest rates tame inflation without hurting growth?,” asked Motilal Oswal Group Chief Economist Nikhil Gupta.

Some economists now expect the growth rate to be only around 6-6.5 per cent for the ongoing fiscal.

Insiders of industries ranging from real estate to consumer goods said the interest rate hike will hurt demand, especially for discretionary purchases.

“The hike by 50 bps (50 basis points = half a percentage point) is definitely on the higher side, and home loan lending rates will now edge further into the red zone,” ANAROCK Group Chairman Anuj Puri said, adding that the move was a double whammy for a sector that was already coping with higher costs of everything from cement to steel.

Central banks across the globe have been raising interest rates to tackle multi-decade high inflation.

“50 basis points has become the new normal,” Das said on Friday.

That is not good news for India, which is yet to recover fully from the pandemic-induced slowdown.

“The actual impact will depend on the amount of increase passed on, the overall CPI and inflationary pressures, economic growth,” said Deloitte India Partner Rajat Wahi.

The hike will also make vehicle loans more expensive in the world’s fourth-largest auto market.

“As a high majority of automotive retail is dependent on financing, it will make an impact. So, with the vehicle costs already seeing an increase, it will take the overall TCO (total cost of ownership) higher,” said Suraj Ghosh, Director, Powertrain & Compliance Forecasts, South Asia, S&P Global Mobility.

Higher ownership costs will make it difficult for fleet owners to transition to electric vehicles (EV), said Rajiv K Vij, founder of Plug Mobility.

Many others worried about how the latest RBI move will hurt the job market and the flow of funds.

“We can expect startup funding to decrease and layoffs to be prominent in the near future,” said Rohit Arora, co-founder of fintech startup Biz2Credit.

The RBI expected the inflation to moderate going into Q4FY23 and Q1FY24 and is likely to continue its northward journey in rates to bring down the inflation to below its target of 6 per cent.

“It’s now basically a whatever-it-takes approach going into (the) third year in succession,” Das said.