Inflation Worries: RBI set to keep repo rate unchanged

The Reserve Bank of India (RBI) is expected to maintain the repo rate at 6.5% in its upcoming monetary policy meeting on 6 December 2024. This will mark the eleventh consecutive time the rate remains steady. Experts predict this decision as the central bank continues its fight against stubbornly high inflation.

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India’s inflation rates remain a pressing issue. Despite global trends showing cooling prices, domestic inflation remains elevated. Factors like volatile food prices and geopolitical tensions have contributed to persistent price pressures.

The RBI has a challenging task. It must balance the need to control inflation while ensuring economic growth. High inflation limits purchasing power and impacts savings. The repo rate, which is the rate at which the RBI lends to commercial banks, is a key tool in managing inflation.

By keeping the rate unchanged, the RBI signals its focus on price stability. It has maintained the 6.5% rate since February 2023. Analysts believe this stance reflects the RBI’s cautious approach to macroeconomic risks.

Impact on Home Loans

For borrowers, the unchanged repo rate could mean steady interest rates on home loans. However, there’s a possibility that banks might still adjust their rates upward. Many banks follow a floating rate system tied to the repo rate or other benchmarks.

If lending rates rise, equated monthly instalments (EMIs) could increase. This would put additional pressure on homebuyers and those with existing loans.

On the other hand, the housing sector has been a key driver of economic recovery. Stable or lower interest rates support home-buying sentiment. Experts say the RBI’s decision could indirectly influence the sector’s growth.

Global Comparisons

Central banks worldwide are also grappling with inflation. The US Federal Reserve and the European Central Bank have slowed their rate hikes but remain vigilant. However, India’s inflation dynamics differ due to factors like monsoon performance, currency fluctuations, and import dependencies.

By holding the repo rate, the RBI ensures India aligns its monetary policy with local economic realities. This cautious stance seeks to prevent over-tightening, which could hurt growth prospects.

Growth vs Inflation

India’s economy has shown resilience in recent quarters. However, high borrowing costs remain a concern for businesses. Many small and medium enterprises (SMEs) struggle with increased credit costs, impacting their profitability.

Consumer demand, a critical growth driver, could also face challenges. Higher EMIs and limited disposable incomes may reduce spending, especially in urban areas. Rural demand, heavily reliant on agriculture, has been uneven this year due to erratic rainfall.

The RBI has repeatedly emphasised its commitment to anchoring inflation expectations. Its inflation target is 4%, with a tolerance band of 2%. Current rates are well above this comfort zone, limiting room for rate cuts in the near term.

What Lies Ahead?

Economists believe the RBI will maintain a “wait and watch” approach for now. With inflation still high, any rate cuts are unlikely in the immediate future.

Market participants will closely watch the central bank’s tone in the policy announcement. If inflationary pressures ease, rate cuts may be possible by mid-2025. However, much depends on global oil prices, food supplies, and geopolitical developments.

Advice for Borrowers

Homebuyers and borrowers should prepare for potential changes. Experts recommend locking in fixed-rate loans where possible. Floating rate loans could see upward revisions if banks raise their margins.

For investors, high rates may benefit fixed-income instruments like fixed deposits. These remain attractive options, particularly for senior citizens and risk-averse savers.

The RBI’s decision to hold the repo rate at 6.5% underscores its commitment to controlling inflation. While this may bring stability to some sectors, borrowers and consumers must brace for challenges. The road ahead will require careful financial planning as India navigates this delicate economic phase.