The repo and reverse repo rates have remained unchanged since May 2020. Here’s an article for you explaining why RBI is not hiking interest rates.
What’s Happening?
The prices of vegetables are rising due to crop damage. Ever-increasing oil prices have directly increased transportation costs. Raw material prices are soaring. Shipping costs are burning pockets due to congestion at ports. The demand is healthy, but the supply has created a ruckus and powering inflation all across the world. This is called cost-push inflation. The overall prices increase due to the increase in the cost of wages and raw materials.
The recent cut in the excise duty on fuel was offset by increasing GST on clothing, personal care, household goods etc. The unprecedented rise in inflation needs to be eased, and RBI till now has continued to maintain an accommodative stance on the policy rates.
Why Should It Bother You?
Nomura expects inflation to rise to ~5.5% YoY in December. Countries like the UK are already suffering from inflation to 5.1% in November, the highest since September 2011. If India also reaches the same level, it will be important for the central bank to call immediate action, given that we are a developing nation. Many analysts believe that the RBI will have to hike the repo rate by at least 100 bps cumulatively in 2022.
Why Is RBI Staying Put?
Post pandemic, there has been a visible recovery across the board, and the RBI wants to support it. It wants businesses to flourish and people to borrow more money. All of this points to aggregate growth. And that’s the reason why RBI wants the interest rates to be lower or stay just the same.
What’s In-Store?
The last thing we want is demand outstripping supply. In case this happens, prices will rise again due to demand with the current supply situation (already high). This is the last thing we want as this could trigger inflation to rise further. The RBI is watchful, and it is doing what it thinks would be the right thing to do. And hence, it continues to keep the interest rates the same and could continue to do it in the future.
