Home Supporting structure Pay loan EMIs? Know how much more RBI could raise interest rates this year

Pay loan EMIs? Know how much more RBI could raise interest rates this year


The Reserve Bank of India (RBI) on Wednesday raised principal interest by 50 basis points to 4.90% in a bid to calm still-high inflation. RBI also revised its inflation forecast for FY23 up by 100 basis points to 6.7%, while keeping GDP projections for FY23 at 7.2%.

The central bank has pledged to withdraw the “dovish” stance as it steps up its fight to rein in prices that have been above the RBI target range since the start of the year.

Banks have been raising lending rates since RBI’s surprise rate hike last month. In an off-cycle increase in May, RBI raised the repo rate by 40 basis points to 4.4%, its first borrowing rate increase since August 2018.

“At the longer end of the money market term structure, interest rates on 91-day treasury bills, commercial paper (CP) and certificates of deposit (CD) firmed after the rate hike in May. Yields on AAA-rated 5-year corporate bonds also rose. The rate hike also triggered an upward adjustment of benchmark lending rates by banks. Bank term deposit rates have risen and will augment stable funding resources amid rising demand for credit,” the RBI chief said in the statement.

Even after the two consecutive hikes, the repo rate remains below the pre-pandemic level. Going forward, the market expects the RBI to bring policy rates down to at least pre-covid levels while simultaneously moderating excess liquidity in the system.

“Following the off-cycle announcement of a rate hike in May 2022, paving the way for a series of rate hikes in subsequent meetings, the RBI raised the repo rate by 50 basis points. The MPC decided to focus on a calibrated housing pullback while supporting growth We believe the market had already priced in a 40-50 basis point rate hike, and the key controllable was a commentary on inflation We could see another rate hike, likely by a similar amount, in the next monetary policy to manage inflationary pressures,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities.

The policy tone continues to be hawkish and therefore the RBI should continue to raise the repo rate to ensure a neutral to slightly positive real policy rate.

“The 50 basis point rise in the repo rate comes against the backdrop of continued high inflation and continued upside risks. Given that inflation is expected to remain above 6% until 3QFY23, RBI needs to price equities in. We continue to see another 60-85 basis point hike in the rest of FY23 to manage inflationary expectations,” said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank.

“As the RBI continues to forecast strong growth, it is very likely to offer another 25 basis point hike on August 4 before pausing tightening and structural constraints,” said Nikhil Gupta, economist in chief, Motilal Oswal.

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