RBI’s Interest Rate Cycles: Even as the RBI MPC has decided to halt the rate hikes and go for a status quo on the key repo rate on Thursday, people are wondering if it is the end of the current interest rate hike cycle in India. Markets were expecting one more rate hike by the RBI on Thursday before stopping the rate hikes in the future. Here’s what experts say about it:
What Is A Rate Hike Cycle?
A rate hike cycle is a period during which the RBI continuously raises the interest rates in the country. It is done to contain inflation. On the other hand, in the rate cut cycle, the RBI goes on cutting the interest rates over a period of time to pump in liquidity in the system, to push economic growth.
Current and Previous Rate Cycles: Hikes, Cuts, Status Quo
In the current rate hike cycle, the RBI started raising the repo rate from May 2022. Since then, the central bank’s monetary policy committee has raised the repo rate by 250 basis points (bps) to 6.50 per cent. The repo rate is the rate at which the RBI lends money to commercial banks. A basis point is equal to a hundredth of a percentage point.
Also Read: RBI MPC Meet LIVE Updates: RBI Has Taken a Good Call, Says FM Sitharaman to Keep Rates Unchanged
The previous repo rate hike cycle was recorded between April 2009 and January 2014, during which the repo rate was raised from 4.75 per cent to 8 per cent. Subsequently, the period between January 2015 and May 2020 saw continuous rate cuts (rate cut cycle), during which the repo was cut to half from 8 per cent to 4 per cent in around five years.
However, the period between May 2020 and May 2022 saw the status quo in the repo rate at 4 per cent. After May 2022, the RBI started the current rate hike cycle.
What Do Experts Say?
Stating that there is a possibility of further rate hikes, Aditi Nayar, chief economist and head (research & outreach) at ICRA Ltd, said, “If inflation does not fall in line with the MPC’s assessment for Q1 FY2024, another hike could be in the offing, especially if the financial stability situation stabilises.”
She added that financial stability concerns appear to have pre-empted a pause as the MPC assesses the impact of its cumulative 250 bps of rate hikes.
Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, said, “There will be two more rate hikes of 25 basis points that the RBI has kept in its arsenal, but the RBI wants to use it judiciously while watching how inflation numbers pan out.”
Echoing the similar views, RBL Bank Economist Achala Jethmalani said that basis the current growth-inflation dynamics and the global backdrop, the repo rate is likely to peak out at 6.50-6.75 per cent with a possibility of a final 25bps to be delivered in 1H FY24.
Giving a balanced view, Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said, “The RBI remains comfortably on the growth front, for now. We believe the risks to this outlook is skewed towards the downside. We expect the RBI MPC to remain on an extended pause. Scope for further hikes is limited given our growth-inflation outlook and impact of the past rate hikes on the same.”
What RBI Governor Shaktikanta Das Said In This Regard
While announcing the status quo on Thursday, RBI Governor Shaktikanta Das said the Monetary Policy Committee will not hesitate to take any action in future.
The RBI MPC on Thursday unanimously decided to keep the repo rate unchanged at 6.50 per cent. The RBI MPC also voted to remain focussed on ‘withdrawal of accommodation’ by 5:6 majority.
The reverse repo rate and CRR also remained unchanged at 3.35 per cent and 4.5 per cent, respectively. The RBI also kept the SDF unchanged at 6.25 per cent, and MSF and Bank Rates maintained at 6.75 per cent.
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