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RBI set to hike repo rate to 7 year high of 6.75%

March 31, 2023

RBI set to hike repo rate to 7 year high of 6.75%
The RBI’s key policy rate is set to hit a seven-year high next week from an all-time low in May 2022 as the central bank battles to bring core inflation under control. Most economists forecast a 25bps increase in the key repo rate to 6.75% at which the RBI lends to banks. If the RBI does increase rates, it will be its sixth successive hike and a total of 275 basis points since May 2022.

A rate hike will result in all loans becoming costlier and will extend the tenure of long-term home loans by over a year if borrowers do not increase their EMI. For account holders, fixed deposits will become more rewarding. The higher interest rate is also likely to temper demand in the economy despite improved fundamentals.
 
A rate cut is expected because cereal and milk inflation continues to remain high, and there are fears that food prices could face upward pressure if the El Nino phenomenon plays out. The chances of a rate hike have increased with the US Federal Reserve and the Bank of England raising rate s by 25 basis points this month. 
 
According to Axis Bank chief economist Saugata Bhattacharya, after a final rate hike in April 2023, the next move would a reduction in 2023-24. He adds that transmission of earlier rate hikes is incomplete in banking as term deposit rates have just about risen in line with the 250bps rate hike rate hike announced by the RBI so far while other rates have risen less than the repo rate in the last year.
 
ICRA chief economist Aditi Nayar also believes that the MPC will vote to hike rates by 25bps, but the six-member panel is likely to vote in favour by a narrow majority.
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