Rate tinkering and impact on Indian economy

Hello Everyone,

I have always been curious about the impact of rate adjustments by RBI and the kind of rational they give to support the move.
Have any of you come across any solid study conducted in Indian context, which proves that the increase in repo can actually help contain inflation?

Here are some of my thoughts.

In a country where access to formal channels of credit continues to be day dream(or may not be even figuring in dreams because they are just not aware of such opportunities) for the the vast majority of its citizens i’m not sure how such policies impact the citizens positively.
As far as i’m concerned the cost of almost everything has gone up during the last 2 years and the reason for the same is due to the slow down in mining/ manufacturing/ logistics and allied activities due to the disruption caused by the pandemic and it will come back to normal once the life is back to normal and demand supply equation is restored.
Indians were not dolled out any cash incentives unlike in the western economies where citizens were paid significant amount of money directly by government in the name of unemployment wages etc. I can certainly understand the inflationary impact arising out of currency printing which the western governments did - but this was not the case in India. Our lower middle class and poor are struggling to come out of the pandemic inflicted troubles including job/ wage losses. The free ration of food grains which was given to lower middle class and poorer sections of the society were in kind and should not have any impact on the inflation. Note that our income tax and GST collections(not mentioning the excise duty from fuel) are at its highest level and government is in a much better position to fund these grains procurement.
I believe the smarter corporations which have pricing power will pass on the incremental interest cost to the end buyer which will further increase the cost of living for an average citizen and create more poverty and unrest in society.
Further the interest in interest rates will have a significant negative impact on the MSME and the unorganized sector which generally work with laser thin margins - we could see a significant number of bankruptcies and job losses - not sure pushing people into poverty is what the RBI honchos intention was - anyway the unintended consequence of their action will lead exactly to this.
As far as normal urban middle class which pay EMI for home are concerned - they will now be paying interest(repo linked) of at least additional 1% which lead to an actual rise in monthly EMI by about 10-15% in real terms(calculate how much more a home loan having interest rate of 7% will be impacted when the same loan is moved to 8% interest) leaving them poorer, frustrated and disgruntled.
At a macro level increase in interest rates lead to depreciation of our currency due to the exchange rate arbitrage that it creates, leaving the vast majority our population who save in rupees poorer.
I dont think the stated purpose of reducing inflation can be achieved by increase in repo rates, rather this will lead further increase in prices of goods and services that an average citizen consume, lead to unintended loan defaults leading to bankruptcies, increase the credit cost for lenders and leave the citizens and the country poorer.

These are just some of the thoughts which has come to my mind after being flooded with the news of 50 basis points increase in rates by RBI today. I’m not a student of economics and have limited understanding of it and accordingly feel free to correct and enlighten me with the right thought process and evidences.

Wishing you all a happy day!

Disclaimer: Not indebted to any financial institutions other than minor credit card bills :slight_smile:

1 Like

Very well articulated. If you check the recent history of RBI, you may conclude that their main worry was the outflow of dollars rather than the domestic inflation. RBI action was synchronised with interest rate hike in the US although inflation remained high from several quarters before.

Factors that are worrying me:

  1. Despite a contuining growth slowdown since 2016, the taxes, particularly on fuels, have remained high. Now, the limits of taxation has been reached due to the persistent inflation.

  2. Indian economy has been unable to grow well since 2016 despite lose monetary policy. Now, the monetary policy is tightening.