The Reserve Bank of India RBI has kept its inflation projection unchanged for FY 23 and has remained unchanged since September 30, due to upside risks to food prices. The repo rate was raised by 50 basis points bps to 5.90 per cent on Friday amid rising concerns over surging inflation, global headwinds, and a slump in the rupee to its record lows, according to RBI Governor Shaktikanta Das. He stated that the central bank is watching the price situation closely, and that the rate-setting panel is concerned about the inflation.
RBI Governor Shaktikanta Das said that the Indian economy remains resilient despite global headwinds wherein global recession fears are mounting, inflation high.
He said that inflation is expected to be elevated above the central bank's 6 per cent threshold in the second half.
He said fuel inflation moderated with a reduction in kerosene PDS prices, but it remained in double digits. Inflation of the core CPI, minus the food and fuel, remained sticky at heightened levels, with upside pressures across various constituent goods and services.
Inflation in India has been high since the beginning of this year. Retail inflation in India has stayed above 6 per cent since January. It was above 7 per cent in April, May, June and August. The tolerance limit of the RBI is between 2 and 6 per cent.
Inflation is expected to reduce to 5 per cent by April-June or the first quarter of next fiscal year, according to Das. He said that if high inflation is allowed to linger, it could lead to second round effects.
The central bank hikes the repo rate when the country is reeling under high inflation, as per the norms. If the country is headed towards deflation, it is slashed. The interest rates paid by commercial banks on loans from the RBI go up when the repo rate is raised. The loans become dearer, which decreases their loan-taking capacity.
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After the repo rate goes up, commercial banks increase interest rates on deposit accounts in order to increase the cash at the bank's disposal. This helps customers earn interest on their investment, thus reducing the amount of money in their hands. High fixed deposit rates reduce the money in circulation or liquidity because investors want to earn money from savings. As more investment is done, the prices cool down.
On the other hand, the banks increase the interest rates on loans that customers take in the form of home loan, auto loan, personal loan, etc. The high repo rate makes loans costlier for consumers.
In the long run, customers would start taking fewer loans, reducing the money at their disposal. This would reduce the buying of items such as house, car, and others. When there is a fall in liquidity, there is a fall in demand in the economy, which ultimately brings down the inflation.