Published: Published Date – 12:53 AM, Fri – 10 June 22

The Reserve Bank of India’s decision to raise the repo rate — for the second time in over a month — by 50 basis points sends a message that the central bank is focused more on taming runaway inflation. However, the move is expected to hurt economic recovery as home and vehicle loans are set to become costlier. When the RBI increases the repo rate, banks generally follow it by hiking interest rates against home loans, car loans and others. If banks increase interest rates, then EMIs also go up, impacting borrowers. The central bank has projected inflation to remain above its upper tolerance band of 6% through the first three quarters of the financial year 2022-23. Banks and housing finance companies, which have already raised their lending rates between 40 bps and 50 bps following the 40 bps hike in repo rate in May, are now expected to raise the rates again. Concerned by soaring inflation, the RBI is likely to opt for an additional hike of 50-100 bps over the remaining part of the year. In fact, Governor Shaktikanta Das has said future decisions on rate hikes would be in line with developments around inflation. While the inflation rate has been projected at 6.7% for 2022-23, the central bank remains hopeful that the economy will grow at 7.2% in the current fiscal. A normal monsoon and improved vaccination coverage are expected to help in economic recovery. The hike in interest rate comes as consumer price index (CPI)- based retail inflation galloped for a seventh straight month to touch an 8-year high of 7.79% in April.

Inflation is soaring mainly on account of surging commodity prices, including fuel. The ongoing Russia-Ukraine war has further pushed up commodity prices across the globe. Wholesale price-based inflation has remained in double digits for 13 months and touched a record high of 15.08% in April. Rising inflation is going to be a bigger policy challenge than growth for the Indian economy. In the near term, the surge in global commodity prices following the ongoing war in Ukraine and the resultant rise in domestic inflation is expected to impact consumption demand and thereby hurt the growth in the output of consumer goods. High price levels of fuel and food items, especially of vegetables, spices and oils, along with household services, have contributed to the sharp rise in inflation. It remains to be seen how far the optics of fighting inflation like the interest rate hikes will actually impact the country’s economic recovery process. What is certain, however, is that the burden on the common man is going to increase in the days ahead.

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