Home / Economy / Will RBI rate hike serve as dampener to the economic momentum? What experts say

Amidst expectation of 50 basis points hike in interest rate to check inflation, the Reserve Bank of India's rate-setting panel has started deliberations on the keenly awaited monetary policy. The decision of RBI Governor Shaktikanta Das headed six-member Monetary Policy Committee (MPC) will be announced tomorrow, September 30.

“With liquidity withdrawal measures and interest rate hikes, the global economic landscape continues to be volatile and developments there will have a bearing on developing markets," said Shishir Baijal, Chairman and Managing Director, Knight Frank India.

The government has tasked the central bank to ensure the consumer price index (CPI) remains at 4 per cent with a margin of 2 per cent on either side, but retail inflation has stubbornly stayed above the RBI's comfort zone since January. As per the latest data, the inflation was at 7 per cent in August.

“In case of India, at the 7% level now, we are witnessing consistently elevated inflation level, which remains way ahead of RBI’s target rate of 4%. However, the domestic economy is in the initial stages of economic recovery. It is crucial to support the strength of domestic demand, which has already seen some impact as reflected in reduced GDP growth expectations for the current fiscal," said Shishir Baijal.

According to him, a significant rate hike will serve as a dampener to the economic momentum. 

He further added that India's housing sector too has recently started to make a demand recovery after a long down cycle till the pandemic struck severely. "The real estate sector needs further support in terms of low home loan interest rate, which at this juncture has seen a transmission of more than half of the 140-basis point policy rate hike by the central bank. Further rate hikes will have an adverse impact on the real estate sector, which is a huge employment generator and contributor to the GDP of the country," he said.

The RBI, which has since May raised the repo rate by 140 basis points (bps), may yet again go for a 50-bps increase, which will take the key rate to a three-year high of 5.9 per cent, say experts. The present rate is 5.4 per cent.

Industry body Assocham said hike in policy interest rates by the RBI in the range of 35-50 basis points seems unavoidable, given the tightening of rates by most of the central banks including the US Federal Reserve.

"While the industry would like to see lower interest rates, the main challenge and the priority is to tackle inflation head-on so that we have a sustainable growth," said chamber's Secretary General Deepak Sood.

A SBI research report said the Indian markets have, however, performed much better. Specifically, the rupee has been holding remarkably well with RBI intervention supporting it in the market.

"This is in sharp contrast to the 2013 taper tantrum crisis when the rupee witnessed significant volatility for a prolonged stretch of time. We believe that it might be better for RBI to allow the rupee to depreciate a bit, finding its natural balance," it said.

 

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