Borrowers breathe a sigh of relief, inflation worries to stay for now

Reserve Bank of India (RBI) Governor Shaktikanta Das keeping repo and reverse repo rates unchanged, borrowers breathed a sigh of relief, though depositors may have to settle for deposit rates lower. However, inflation concerns persist among consumers for the time being, although experts say it would be positive for the economy in the long run.

The reverse repo rate is the interest rate the RBI charges when it lends to commercial banks, while reverse repo is the rate at which the central bank takes money from commercial banks.

This is the ninth consecutive time that RBI has maintained the status quo amid current uncertainties, given the threat of Omicron, the new variant of Covid. The RBI last changed the rates in December 2020. Since then, the reverse repo rate has remained unchanged at 4% and reverse repo rates at 3.35%.

Relieved borrowers

In the wake of wage cuts and job cuts over the past year, borrowers feared another blow in terms of increased monthly installments (EMIs). “I’m relieved that my home loan EMIs are staying the same because higher prices for things and high credit outflow would have been very difficult to manage. Already, with the uncertainty of unemployment, urban families are under a lot of stress, ”explains Amrita Deka Verma, 43, a professional based and working in Noida.

Experts agree that this is a boost to affordability. “The unchanged pension rates will help maintain the status quo on the current low interest rate regime for some time to come. It works well for all mortgage borrowers as the affordability environment will continue, ”said Anuj Puri, chairman of ANAROCK group, in a statement on monetary policy.

No incentive for depositors, including retirees

With policy rates unchanged, interest rates on term deposits and the like could remain low, although a few banks have recently raised their interest rates.

Low interest rates eat away at the real yields (interest rate minus inflation rate and taxes) on term deposits (learn more here).

But there will be no impact on global economies, experts assured. “The savings will not be affected, which is exactly what current conditions demand,” said Raj Khosla, founder and CEO of My Money Mantra, a phygital financial services company.

There appears to be growing concern among various investors. “Politics seem to be lagging behind. But it’s good for short term bonds and mutual fund programs like short term bond funds and working capital with a current maturity of less than three years, ”said Sandeep Bagla, CEO of Trust Mutual Fund, a financial company.

Inflation concerns continue

“The position (on inflation) remains accommodative for as long as necessary to revive and support growth on a sustainable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within. the target in the future, ”Das said during the briefing.

RBI clarified in its press release that the persistence of high core inflation (CPI inflation, excluding food and fuel) since June 2020 is a matter of concern given the pressures on input costs that could quickly be passed on to the economy. retail price inflation as demand strengthens. In this context, the reduction of excise duties and VAT on petrol and diesel will lead to a lasting reduction in inflation through direct and indirect effects acting on fuel and transport costs.

Although central banks generally increase repo rates to control inflation. Over the past year, inflation continued to rise even as the RBI cut repo rates. “Given the multiple pressures and pressures on our economy affected by Covid, an unchanged repo rate is the perfect path. Inflation will of course remain under control. A constant pension rate ensures that the financial system is full of liquidity, thus encouraging economic activity, ”explains Khosla.

While consumers worry about inflation, experts assure that a lower repo rate with a slight increase in inflation can have a positive impact on the overall economy in the long run. “There is a positive side to inflation, even if it’s not good for consumers. But a slight rise in inflation means that demand has also increased. Thus, it is possible that the increasing demand will lead to an increase in production and supply. With the increase in production, there will also be growth in employment and income. So a small rise in inflation is not bad; rather, it is a sign of a vibrant economy, ”says Dr Sudakshina Gupta, economist and head of the Department of Economics at the University of Calcutta. She clarified that a slight rise in inflation is not a problem, provided the government can manage it properly and ensure steady GDP growth, as Covid has had a negative impact on GDP.

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