‘No Major Impact’ On RBI’s Independence But Next Rate Hike Expected Only In April 2019, Says Report

The RBI building in Kolkata. (Indranil Bhoumik/Mint via Getty Images)

According to a poll conducted by the news agency, Reuters, the RBI (Reserve Bank of India) is not expected to raise interest rates in the near future and the hike might come only after April 2019. This view expressed by many economists in the poll is different compared to the market sentiment just a month ago.

While the vast majority, two-thirds of the cohort, maintained there was no major impact on RBI’s independence, a third of the 46 respondents felt that the independence of India’s central bank has ‘somewhat diminished.’ This comes after differences between the RBI, and the Union government spilled out in the open, following the interview of RBI’s deputy governor, Viral Acharya, in late October 2018.

While a Reuters poll, conducted after RBI announced on 5 October that it would keep the repo rates unchanged at 6.5 per cent, predicted that the central bank would hike interest rates in its 5 December meeting, and then, hike them again in 2019. But the most recent poll, conducted in the last week of November 2018 said that the MPC would still keep the repo rate at 6.5 per cent.

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RBI’s Monetary Policy Committee (MPC), created under the current NDA government, is the apex authority that decides on the interest rates in India. It meets at least four times a year.

It should be noted that interest rates (the rate at which individuals and firms can take loans from banks) and inflation (general increase in prices in an economy over a period of time) usually have an inverse relationship. Thus, with inflation in India falling to 3.70 per cent in September 2018, the markets expected RBI to increase the rates. However, higher interest rates make borrowing costly for customers and thus harm the growth of the economy.

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