Between May 2022 and February 2023, the Reserve Bank of India hiked its repo rate by a total of 250 basis points to tame runaway inflation. While inflation remains high, the RBI on April 6 surprisingly decided to keep its repo rate unchanged.
The RBI monetary policy committee (MPC) decided to keep the policy repo rate unchanged at 6.50 per cent and other policy rates were also kept unchanged. “The monetary policy committee decided unanimously at 6..50 per cent with a readiness to act if the situation so warrants,” the governor said.
So, what prompted the RBI to hit a pause?
While the growth-inflation balance is the usual suspect, it could also be the ripple effect from the collapse of a couple of banks in the US and one in Switzerland.
RBI Governor Shaktikanta Das did not mention the name of the banks in his speech on monetary policy, but in his opening remarks he did mention “fresh headwinds from the banking sector turmoil in some advanced economies.”
So, after seeing a rise in EMIs every two months since last year, there is some relief for borrowers. But once should keep their fingers crossed for now as the governor did warn that the Monetary Policy Committee that decides the repo rate will be ready to act, should the situation so warrant.
One should also be well prepared as the governor while talking of inflation choose to quote Kautilya – “Be not slack before the whole job is finished.”
However, if this turns out to be a pause before a cut in rates as everyone will be hoping, it may be a good time to lock in your fixed deposits at current rates.
And why is that? The interest rate on fixed deposits is mainly a function of two variables – How much is the repo rate and how desperate are banks for your money?
The liquidity in the banking system, which indicates the desperation of banks for your deposits, has mostly remained comfortable. This leaves the repo rate to be the prime driver of how much your fixed deposit will earn. If the RBI decides to cut the repo rate in the future, you will lose out on the opportunity to lock in on one of the highest interest rates in the past couple of years.
The decision has left economists divided, with several among them seeing a prolonged pause, while others think that the central bank’s next move will depend on the economic data. The most significant factor driving the RBI’s decision will be inflation. Economists believe the RBI may not lift interest rates over the next few months if inflation does not get out of hand, even if it remains higher than its tolerance levels.
What does this mean for the common man?
This means that at least for the next couple of months, till the RBI meets again, your home and car loan interest rates will remain the same.
It also means that the elevated rates on fixed deposits, too, will remain where they are. So, if you are sitting on some extra cash that you want to earn some handsome returns on, now may just be the right time to go in for that fixed deposit.
So what do you think? Was this a good decision for the economy? Tell us in the comments.
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