RBI hikes repo rate by 25bps taking benchmark interest rate to 6.5%

New Delhi : The key benchmark interest rate in India was increased by 25 basis points (bps) to 6.5 percent on Wednesday, as announced by RBI governor Shaktikanta Das. The vote in the MPC was 4-2. The 2023 increase is the first increase in rates. An increase of 35 basis points was made to the repo rate on December 7.

Since the “situation does not look so grim now,” Das added, the MPC has decided to shift its attention to ending its “accommodative stance.” On February 6, the MPC convened, and by February 8, they had wrapped up their deliberations.

According to Das, the Indian economy is strong despite the uncertainty of the global economy. Domestic growth would be stifled, however, by sluggish exports and a generally dismal economic climate. The bank will keep a “vigilant eye” on the economy.

The GDP growth prediction for FY23 was raised by Das from 6.8 percent to 7 percent. The growth forecast for FY24 is 6.4%. Latest Economic Survey from the Finance Ministry predicted growth of 6.8% in FY2023-24.

“To meet the challenges of the growth vs. inflation matrix, RBI has kept its overall stance unchanged and has not yet moved to neutral. The RBI has reduced its GDP growth forecast for the coming year to 6.4% due to the ongoing uncertainties and volatile global scenario; this is still competitive with other major economies “A statement by Resurgent India’s MD, Jyoti Prakash Gadia.

According to the RBI governor, “the world economy does not look so grim now,” and inflation has been declining. Inflation at the register should average 5.7% in the fourth quarter. However, the “stickiness” of the core inflation continues. Our inflation forecast for FY23 remains unchanged at 6.5%. Inflation is forecasted to average 5.3% in FY24.

In addition, he predicted that even though inflation will decrease in the next fiscal year, it will still be above 4%. With a 2% buffer on either side, the RBI is tasked with maintaining inflation at 4%.

Das also mentioned that the hours of operation of the government securities market returned to their pre-pandemic norms of 9am to 5pm. The RBI has finally approved G-secs for borrowing and lending.

Banking and credit rates are governed by RBI policy. If the repo rate goes up, then the interest rates on deposits and loans will also go up. Likewise, when the repo rate is lowered, the pattern persists.

“As we approach the apex of the current interest rate hike cycle, we can expect to see a slowdown in discretionary spending as the effect of higher interest rates begins to take hold. For the next two to three quarters, we will face difficulty as a result of the slowdown in demand until we enter a cycle of interest rate cuts. Inflation will begin to slow after that, and the pent-up demand that results will help get the consumer goods sector back on its feet. Budgetary stimulus from the cut in individual tax rates and a successful Rabi crop planting will boost rural and urban consumption in the near term, while the Centre’s emphasis on capex will maintain infrastructure growth. We do not expect the recent RBI rate hike to have any noticeable effect on the economy, as the central bank’s commentary and announcement were generally in line with street expectations “Right Horizons PMS CEO and Chief Investment Officer Anil Rego said.

“It is anticipated that the banking industry will also respond favourably, leading to increased depositor real interest rates and robust expansion of the credit market. To focus on inflation right away while still encouraging growth in the medium term, RBI opted for a pragmatic approach ” said Gadia.