What does the latest interest rate hike by RBI mean?

RBI has announced an increase in repo rate of 35 basis points. One basis point is .01%. This takes the repo rate to 6.25%. Standing Deposit Facility Rate and Marginal Standing Facility Rate were also increased by 35 basis points to 6% and 6.5% respectively. RBI Governor said that the more modest interest rate hike is because of slowing down of inflation. Consumer price inflation rate stood at 6.77% in October. The Governor added that inflation remains high and the battle against inflation will have to continue.

2023 is the year before General Elections. Inflation has been identified as a major factor that affects poll outcomes. In fact it has been found to be even a bigger factor than economic growth when it comes to affecting poll outcomes. The Government will therefore try to lower inflation rate over the next one year. It may make lowering inflation rate the top priority over the next one year. At the same time it needs to keep economic growth in check so that unemployment rate does not shoot up further. Much of inflation that India is currently seeing is supply side one. So RBI can do little when it comes to lowering the inflation rate. This is clearly visible now. Even after 5 successive interest rate hikes this year, the central bank has still not succeeded in bringing inflation rate significantly down.

The adverse impact of successive interest rate hikes on economy is also now clearly visible. RBI today revised down its GDP growth forecast for FY23 to 6.8%. It has also forecasted that consumer price inflation for entire FY23 will stand at 6.7%. It will be a challenging next year for RBI. The room for increasing interest rates further has been narrowed with these successive interest rate hikes. The outcome that it was targeting – a significant decline in inflation rate – has still not been achieved.