RBI raises repo rate again

Triple whammy hits the Indian economy

Business & Politics

August 5, 2018

/ By / New Delhi

Last week, the Reserve Bank of India (RBI) raised the repo rate – the interbank overnight lending rate. The second increase in three months points towards rising inflation, coupled with higher fiscal deficit and high crude prices spell trouble for the Indian economy.

In its bi-monthly meeting the Monetary Policy Committee of the Reserve Bank of India (RBI), decided to hike the repo rate by 25 basis points (bps) to 6.50 per cent from the previous rate of 6.25 per cent. Repo rate is the rate at which RBI lends short-term money to commercial banks.

The increase in repo rate will definitely result in increase in interest rates of loans and advances made by banks and it is likely to have a strong impact on availability of credit for companies, especially the small and medium enterprises, which form the backbone of the Indian economy. Bank credit has been under stress for over five years now, with credit now standing at the lowest level since 2012.

“We urge the Reserve Bank (of India) to ensure that commercial banks do not raise interest on SMEs in particular as any hike in lending rates will be harmful to the SMEs and the economy”, the Karnataka Small Scale Industries Association said in response to the rate hike. The association also requested the RBI to maintain current rates to the MSMEs and further reduce it keeping in mind the need to revive and speed up economic growth so that the economy attains its full potential.

The higher rates will hit not only the companies – big or small – but also individuals – especially the home loan and personal loan seekers. Housing sales could also be affected due to the rate hikes. However, Anshuman Magazine, chairman, India & South East Asia, CBRE Group – a commercial real estate services and investment firm, says, “The hike is unlikely to impact the real estate sector because most of the home loans are floating in nature and come with 15-20 year tenure. Therefore, the rise and fall in the interest rates will get balanced out during the loan life cycle”.

But what would be more worrying for realtors and other companies is that the MPC has kept its stance rather hawkish, indicating that further rate hikes could follow soon, making credit even more expensive.

Inflation likely to stay high
Inflation is unlikely to recede soon due to multiple factors. One is the rising fiscal deficit. The government admitted that it would not be able to meet its declared target of 3.3 pc of the GDP. This is mainly due to a series of populist measures that the central government has launched, in anticipation of parliamentary elections that are slated to be held by April next year. These include a 50 pc increase in guaranteed prices at which government buys agricultural produce from the farmers. This hike could statistically further push up retail inflation by 73 bps. In addition, the government also announced a large-scale health insurance for the poorer sections of the society.

The deficit is likely to increase further due to the expected failure of the government to divest in some public sector companies as well as privatise other cash-burning government-owned entities like Air India. The high prices of crude oil, which have risen over 50 pc in the last year or so, are expected to rise further due to the mounting tensions in the middle east and sanctions on Iran, the second largest supplier iof crude oil to India.

In addition, falling Indian Rupee is also adding to the conundrum of the RBI. The Rupee has hit record lows against the US Dollar and the currency is expected to weaken further, adding to inflationary pressures and which could lead to further rate hikes in the near future.

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  1. Shruti says:

    Thanks saumya.
    Its of great help !

    1. Thanks. Glad you liked it.

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