RBI Rate Hike and Its Impact

In News

• Recently, the RBI raised its main policy rate and the Repo rate for the second time in over a month by an expected 50 basis points to control inflation.

About the recent hikes

• Repo rate: The central bank has now raised the Repo rate by 90 basis points to 4.90 per cent.
  • Repo rate refers to the rate at which the RBI lends to commercial banks.
• Growth projection: The Monetary Policy Committee of the RBI, in its bi-monthly policy review, has maintained its previous growth projection of 7.2 per cent for 2022-23.
• The World Bank projections: had slashed its growth forecast for India for the current financial year to 7.5 per cent, a sharp 1.2 percentage points cut from its previous forecast of 8.7 percent.
• Inflation: The RBI also projected inflation to rise to 7.5 per cent for April-June this year and 6.7 per cent for the full financial year, sharply up from the 5.7 per cent.

Impact on the economy

• Impact on demand: The hikes are set to raise the lending rates in the banking system and impact the demand in the economy.
  • When interest rates are raised, it makes money more expensive, thereby resulting in reduction of demand in the economy and bringing down inflation.
• High EMI’s: The rate hike will force banks and non-banking finance companies to increase lending rates and result in higher equated monthly instalments (EMIs) of existing borrowers.
• New home, vehicle and personal loans will also become costlier.

Challenges

• Escalating geopolitical tensions: Although India’s direct trade exposure to countries at the epicentre of the conflict is limited; the war could potentially impede the economic recovery through elevated commodity prices and global spill-over channels.
• High inflation and Low growth: Generalised hardening of global commodity prices, the likelihood of prolonged supply chain disruptions, dislocations in trade and capital flows, divergent monetary policy responses and volatility in global financial markets are imparting sizeable upside risks to the inflation trajectory and downside risks to domestic growth.
• Concerns over protracted supply disruptions have rattled global commodity and financial markets.

Way forward/ Suggestions  

• Improvement/ Recovery: RBI said that the economy remains resilient to global challenges and is witnessing recovery, towards rising rail, port and air traffic, GST collections, improving capacity utilisations, rise in bank credit disbursals and signs of improvement in rural and urban demand.
• The central bank is now focussed on withdrawal of accommodative stance as the liquidity surplus remains higher than pre-pandemic levels whereas the rates are still below the pre-pandemic levels.
• The forecast of a normal monsoon should boost kharif sowing and agricultural output.
  • This will support rural consumption.
• Interest rate hike will help to ensure that growth is not affected as unchecked inflation can affect discretionary consumption, which in turn will affect growth.

Source: IE