With the latest rate hike by the RBI, will the economic momentum shift downwards?- Click here to know!

Economic Momentum as the RBI hikes repo rate!

RBI has hiked the repo rate by 50 bps

The RBI has announced the repo rate hike of 50 bps in its September MPC meeting. The rate hike was as per the expectations. With the August CPI inflation at 7%, and the government's mandate to bring the inflation down to 4%, the hike was expected. The inflation has been stubbornly high. The inflation has been above the RBI's comfort level since January this year. 

The target inflation set by the RBI is 4%. A tolerance level of +/- 2% is acceptable to the RBI. The economic recovery has just started, and the economy needs strength at this moment, as per the experts. With the increase in repo rates, the interest rates on the loans increase, and it contributes to higher expenses for businesses and individuals. So, how will the economy be affected, and whether this rate hike dampen the economy? Let us find out!

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The economic impact of the repo rate hike

The rate hike can act as a dampener, as per the experts. This year the repo rate has increased by 1.9% across 4 MPC meetings. 3 of the meetings were scheduled meetings, whereas one meeting was an unscheduled meeting. The real estate sector requires the support of low interest rates to help the sector recover after a slump. The real estate sector provides high employment to the masses, and the real estate allied sectors are significant contributors to the economy. 

How will the rupee be affected?

In the 2013 taper tantrum, the rupee depreciation was a big issue. The rupee witnessed huge volatility at that time. The RBI should let the rupee depreciate this time and find its natural balance. It will be better for the economy if the rupee finds its natural balance. Then, the economic recovery will be steady and more sustainable. 

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The economy might be affected because of the repo rate hike. The repo rate is now at 5.9%, from a low of 4%. This 1.9% increase will increase the EMI for businesses and individuals. Thus, the economy might be dampened because of this repo rate hike. The RBI will, in the future, need to find a balance between inflation and economic growth to make this economic recovery for sustainable for long-term growth.

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