RBI Hikes Lending Rate to 6.25%; Home, Auto Loans Set to Become Costlier

Mumbai: The Reserve Bank on Wednesday expectedly raised the benchmark lending rate by 35 basis points (bps) - the fifth increase since May - saying it remains focussed on bringing down the inflation to a tolerable limit.

The move to raise the rate will make loans -- including housing, auto -- and corporate credit expensive.

Terming the Indian economy a “bright spot” in the otherwise gloomy world, the Reserve Bank of India (RBI) lowered its estimate of GDP (gross domestic product) growth to 6.8% in the fiscal ending March 31, 2023, from an earlier forecast of 7%.

It, however, kept the inflation forecast unchanged at 6.7% for the current fiscal and projected it to come down below the upper tolerance limit of 6% in the fourth quarter of the current financial year.

The Consumer Price Index (CPI) based inflation, which RBI factors in while fixing its benchmark rate, stood at 6.7% in October. Retail inflation has been ruling above the RBI's comfort level of 6% since January this year.

RBI Governor Shaktikanta Das said the central bank remains nimble and flexible in its approach to deal with the price situation.

The six-member monetary policy committee (MPC) headed by RBI Governor raised the key lending rate or the repo rate by 35 basis points to 6.25%.

With the latest hike, the repo rate or the short-term lending rate at which banks borrow from the central bank has now crossed 6%.

This is the fifth consecutive rate hike after a 40 basis points increase in May and 50 basis points hike each in June, August and September. In all, the RBI has raised the benchmark rate by 2.25% since May this year.

Consequently, the standing deposit facility (SDF) rate is adjusted to 6% and the marginal standing facility (MSF) rate and Bank rate to 6.50%.

The MPC also decided to remain focused on the withdrawal of the accommodative stance to ensure that inflation remains within the target going forward while supporting growth.

The panel also decided by a majority -- 5 out of 6 members -- voted to increase the policy repo rate by 35 basis points while Jayanth R Varma voted against the hike.

Das also said the overall liquidity remains in surplus, with average daily absorption under the liquidity adjustment facility (LAF) at Rs 1.4 lakh crore during October-November compared to Rs 2.2 lakh crore in August-September.

GDP Growth Forecast Slashed

Concerning economic growth, the RBI has slashed its GDP forecast to 6.8% from an earlier estimate of 7% for the current fiscal.

"Growth remains resilient in such a hostile environment...inflation in India is lower than other countries," he said, adding even at the lower GDP growth rate, India will remain among the fastest-growing major economies.

In its last bi-monthly policy review released in September, the RBI had slashed the economic growth projection for the current financial year to 7% from 7.2% earlier on account of extended geopolitical tensions and aggressive monetary policy tightening globally.

‘Arjuna’s Eye’ on Inflation

The RBI projected inflation to come down below the upper threshold level of 6% per cent by March quarter of the current fiscal.

RBI Governor Shaktikanta Das said the central bank will keep 'Arjuna's eye' (focus) on the evolving inflation dynamics and will remain 'nimble and flexible' to deal with the price situation.

Global commodity prices, including crude oil, have undergone some downward correction, but uncertainty continues to surround the near-term outlook in view of the prolonging geo-political hostilities.

Moreover, the resurgence in domestic services sector activity could also lead to price increases, especially as firms pass on input costs.

"Taking into account these factors and assuming an average crude oil price (Indian basket) of USD 100 per barrel, headline inflation is projected at 6.7 per cent in 2022-23, with Q3 (October-December) at 6.6 per cent and Q4 (January-March) at 5.9 per cent," the RBI said.

The RBI has the mandate of keeping inflation under 4%, with a band of (+/-) 2%.

Retail inflation has remained above the upper band of 6% for 10 months through October as the Russia-Ukraine war led to supply chain disruption.