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The much-awaited three-day important review meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has formally started from today i.e. Monday, October 5. In this high-level economic brainstorming, which will run from October 5 to 7, sensitive financial parameters like the country’s macroeconomic situation, retail inflation rate, fluctuations in the prices of food products, global energy crisis and the exchange rate of the rupee will be thoroughly reviewed. After three days of intense discussion and voting, the policy decisions taken by the committee will be officially announced on the morning of October 7. The eyes of crores of bank account holders of the country, common middle class families paying home loan and auto loan installments, industrialists and stock market investors are fixed on the results of this meeting. The biggest question in the market remains whether the Central Bank will maintain the status quo by keeping the policy repo rate unchanged for the fifth consecutive time, or will it take the strict step of increasing interest rates by 25 basis points to control the rising inflationary pressure.
If we look at the current situation of monetary policy, the Reserve Bank of India has kept the policy repo rate stable without any change in the last four consecutive policy meetings. Now this is the fifth consecutive meeting where the rates are to be decided. At present, financial analysts and economists seem to be divided into two major camps. Many major rating agencies and economists believe that the pressure on the central bank for policy tightening has increased significantly in view of the rise in headline inflation rate due to global geopolitical tensions, volatility in crude oil and energy prices and food inflation in recent months. The base case of some experts is that RBI may give a tough message by increasing the repo rate by 25 basis points to keep inflation expectations under control. On the other hand, a strong section of analysts are arguing that since the peak festive season has started in the country, increasing interest rates may have an adverse impact on the credit demand of retail, automobile and real estate sectors. Therefore, to support the pace of economic growth (GDP Growth), the Central Bank can choose the safe path of keeping the repo rate ‘as is’ for the fifth consecutive time.
The biggest challenge before the Monetary Policy Committee of RBI at this time is to deal with the uncertainty of food inflation. Although core inflation i.e. non-food and non-fuel inflation has remained largely under control, periodic surges in prices of pulses, edible oils and green vegetables have hit the household budget of the common man. If this food inflation continues for a long time, it can spread in the form of second wave in salary and service costs also (Second-round effects). Additionally, crude oil and LNG prices remain volatile in the international energy market due to ongoing military conflicts in the Middle East and tensions over strategic maritime routes such as the Strait of Hormuz. Maintaining the stability of the Indian rupee against the US dollar and maintaining capital inflows of foreign institutional investors (FIIs) into the domestic market are also among the priorities of the Monetary Committee. To balance all these global and domestic factors, the committee will have to decide its monetary policy stance very thoughtfully.
For common taxpayers and borrowers, repo rate is not just a technical term, but it is a parameter that directly affects their monthly EMIs and household savings. If the Reserve Bank increases the repo rate by 25 basis points, then all the major commercial banks of the country like SBI, PNB, HDFC and ICICI Bank will immediately increase their External Benchmark Lending Rate (EBLR). Its direct impact will be that the interest rates on home loans, car loans and personal loans taken on floating rate will become expensive, due to which the monthly installment of the borrowers will increase or the repayment period of their loan will become longer. On the contrary, if the MPC decides to keep interest rates stable for the fifth time, existing borrowers will get a huge relief and there will be no change in their monthly EMIs. Also, the existing attractive interest rates offered by banks on Fixed Deposits (FD) will also remain stable, due to which senior citizens and depositors seeking safe returns will continue to get good returns on their savings.
This October monetary review meeting is taking place at a time when festive consumption of Navratri, Dussehra and Diwali is about to reach its peak across the country. The Indian economy witnesses a huge surge in consumer demand during the festive season in both rural and urban areas. Automobile companies, electronics manufacturers and real estate developers achieve a major share of their sales during this period. If interest rates are increased at this critical juncture, middle-class consumers may postpone major spending or new home purchases due to the fear of expensive loans, which would risk slowing down festive demand. This is why industry chambers and manufacturing organizations are continuously demanding that RBI keep the rates unchanged for at least this quarter so that the pace of liquidity and credit growth in the market can continue without any hindrance.
After this high-level brainstorming that lasted for three days, on October 7, the Governor of the Reserve Bank will release the decisions of the committee, revised estimates of inflation and the official projection of GDP growth rate for the current financial year through a press conference. Along with this, financial analysts will keep a close eye on the nuances of the Governor’s statement and the ‘stance’ of the central bank to see whether the RBI will lean towards a tight monetary policy in the coming months or adopt a neutral stance and give signals of relief in the future. If the MPC keeps rates unchanged, it would be a booster dose for the festive economy, and any hike, if any, would be a clear sign of the central bank’s tough fight against inflation. The eyes of every financial sector, corporate world and common citizen of the country are now fixed on the final policy announcement to be made on the morning of 7th October.