RBI set to hike repo rate to 7-yr high of 6.75% in April

RBI rate hike

Mumbai: While the central bank fights to bring core inflation under control, the key policy rate of the RBI is expected to reach a seven-year high the next week. It had previously reached an all-time low in May 2022. Most analysts predict that the key repo rate—the rate at which the RBI loans to banks—will rise by 25 basis points to 6.75%. If the RBI does raise rates, it will be the sixth consecutive increase since May 2022, totaling 275 basis points.

If borrowers do not increase their EMI, a rate increase will make all loans more expensive and expand the length of long-term house loans by more than a year. Fixed deposits will become more lucrative for account holders. Notwithstanding stronger fundamentals, the higher interest rate is anticipated to restrain the economy’s demand.

Since cereal and milk inflation are still high and there are concerns that food prices may increase if the El Nino phenomenon materialises, a rate cut is anticipated. With the US Federal Reserve and the Bank of England hiking rates by 25 basis points (100bps = 1 percentage point) this month, the likelihood of a rate walk has increased.

Saugata Bhattacharya, the chief economist at Axis Bank, predicted that following a last rate increase in April 2023, a drop will come in 2023–24. Term deposit rates have roughly increased in line with the 250 basis point rate hike announced by the RBI so far, whereas other rates have increased less than the repo rate during the past year, the author continues, indicating that earlier rate changes are not fully transmitted in the banking sector.

Aditi Nayar, the chief economist at ICRA, agrees that the MPC will vote to raise rates by 25 basis points, but she predicts that the panel’s six members would only vote in favour by a slim margin. According to Nayar, “the anticipated April 2023 rate hike would raise the repo rate to 6.75%, which is more than 100 basis points higher than the MPC’s CPI inflation forecast for the second half of FY24 and may be sufficient given that the GDP expansion is at best likely to be comparable to potential GDP growth in that period.”

Another rate increase is anticipated as long as inflation remains above the central bank’s tolerance level, according to Barclays analyst Rahul Bajoria. But after analysing several economic possibilities, Soumya Kanti Ghosh, the chief economist of SBI Group, has predicted a pause.