How will the gap of inflation be bridged, RBI will brainstorm for three days

The repo rate was increased six consecutive times from May 2022 to February 2023. During this period, repo rates were increased by 250 basis points. Repo rates had come to 6.50 percent. After which RBI kept the rate stable in the meetings of April, June and August this year.

Even though India's economic growth may remain at 6.3 percent. On which the World Bank itself has approved. On the other hand, inflation still remains a matter of concern for India. The world itself has pressed this panic button for India before the monetary policy meeting of RBI. Now the biggest question before the Reserve Bank of India is how to bridge this gap of inflation? Is it time to increase interest rates again? Will RBI wait for now and keep interest rates in the freezing zone? Brainstorming on all such questions will begin from today. Which will last for three days i.e. 6th October.

However, finding answers to these questions is not an easy task for RBI. There are many reasons for this. The first biggest reason is the prices of crude oil. Which can trouble India more in the future. Which has been mentioned by the World Bank itself. On the other hand, there is uneven rainfall in the country and the effect of El Nino, which can increase inflation in the country. Let us try to understand what kind of speculations are being made regarding the monetary policy of RBI.

RBI has pressed the pause button

After increasing the repo rate six consecutive times since last year, the RBI pressed the pause button and made no change in the repo rate in the last three MPC meetings this year. The repo rate was increased six consecutive times from May 2022 to February 2023. During this period, repo rates were increased by 250 basis points. Repo rates had come to 6.50 percent. After which RBI kept the rate stable in the meetings of April, June and August this year. The fourth meeting of the current financial year is going to start from today. Which will continue till October 6 and on this day the RBI Governor will give his decision.

What is repo rate and how does it affect loans and deposits?

For those who are not aware, let us tell you that repo rate is the rate at which RBI lends money to commercial banks, whenever commercial banks are short of money or need liquidity. Banks borrow from RBI against collateral securities like government bonds and treasury bills. Just as we borrow from banks at the interest rates applicable on the loan, similarly banks borrow from RBI at the repo rate when required.

What do experts say

The rate setting panel of the Reserve Bank of India (RBI) can press the pause button on interest rates this time too. Also, keeping an eye on inflation, one can keep his stance bullish. At present, the prices of crude oil have seen a huge rise. Due to which an increase in inflation may be seen. Speaking to ET, Radhika Rao, Chief Economist of DBS Bank, says that the MPC can maintain its pause stance. He said that global crude oil prices are at the high of November 2022, which has crossed RBI's April estimate of $ 85 per barrel. The average of September is about 9 percent higher than that of August.

According to a Reuters poll of economists, the RBI is expected to maintain its key interest rate (repo) at the current level of 6.50 percent till the end of March 2024. Retail inflation in the country declined from 15-month high of 7.44 percent in July to 6.83 percent in August. This is above the tolerance band of 2-6 percent of RBI. According to Upasana Bhardwaj, Chief Economist of Kotak Mahindra Bank, along with the rising prices of crude oil, food inflation risk remains a matter of concern. Therefore, it is expected that there will be no change in repo rates.

How does repo rate affect loans and deposits?

Since repo rate is a major instrument used by RBI to reduce rising inflation and maintain liquidity in the market. The decision on repo rate during the MPC meeting is taken based on the condition of the economy. Therefore, according to the changing macro economic factors, RBI churns the repo rate every other month and keeps changing it or leaves it stable. Which affects all sectors of the economy including consumer loans and deposits. Generally, when there is an increase in the repo rate, the interest rates on loans as well as bank deposits like FD also increase. On the other hand, when the repo rate goes downwards, the bank deposit rates along with the loan rates also start going down.