Following the global financial crisis of 2008, RBI lowered key policy rates to help industry from slowing down and impacting economy adversely. Between 2008 and 2009 the policy rates were reduced to revive the business cycle in the country. However, owing to inflationary pressure RBI had to manage higher inflation rates along with growth push. This balancing act between inflation and growth will decide the future of the Indian economy. Apart from internal factors, the dependency on foreign markets, especially the US market has made RBI’s job tougher.
Inflation numbers of September have hit a seven month high. Increasing food prices have been the primary driving factor behind increased inflation rates. The consistent supply-shortage for major food items paired with the inefficient food distribution channels are spiraling the food prices upwards. The weakness of the rupee also played its part in pushing the inflation numbers higher. Crude oil imports account for majority of the imports in India. The weakness in Indian rupee has increased the price of crude oil import which adversely impacts the cost of transportation. Any further weakness in Indian rupee will have a significant negative impact on both current account deficit and inflation.
What to expect from 2nd Quarter review of monetary policy:
RBI’s governor, Dr. Raghuram Rajan has outlined that price stability is necessary for economic growth. With inflation firmly in sight we can expect RBI to take measures to curb it. RBI has made its intent clear by increasing the repo rate by 25 basis points in September. This hawkish stance is expected to continue in next few quarters and we can anticipate a 25 to 50 basis points increase in key policy rates before March. The outcomes of external factors like decision of US budget are also likely to affect the policy outlook of RBI.
Impact on Economy
The Indian economy already faces a stiff challenge in the form of sluggish growth. The higher interest rates would have a further negative impact on the pace of growth. The rising bond yields over the last few months stand as a testament of increased cost of borrowing. Considering that RBI is going after inflation, we can expect the growth in India to be affected.
Impact on common man
An increase in interest rates by the Central Bank if and when translated by banks will increase the cost of credit for the consumer. Home, auto and personal loan rates will go up correspondingly. With lower growth rates expected in the near future, expect the job market to be stiff and job insecurities to increase.