How high inflation brings bagful of miseries?
India Today
Find out how the Reserve Bank of India’s latest hike in the repo rate affects you.
You may not have paid much attention to the Reserve Bank of India’s latest hike in the repo rate — the rate at which the central bank lends short-term funds to banks — unless you are about to buy a house or a car on loan, or invest in bonds. The repo rate is a signalling rate indicative of the near-term trajectory of interest rates.
Inflation depreciates your income. Raising interest rates to counter it hits the demand. Even after back-to-back repo rate hikes in a little over a month, the RBI signalled further tightening. But the question is, how does this hawkish turn impact the economy?
Rising prices have outpaced wage hikes and are eroding real incomes worldwide. Almost every central bank has hiked interest rates to tame inflation, just like what India's central bank did on Wednesday. But low income and rising interest rates together can potentially bring economies to their knees.
Budget data shows that the Indian government's interest burden has nearly tripled in the last ten years, soaring from Rs. 3.8 trillion (2013-14) to Rs. 9.4 trillion (2022-23). Internal debt shares more than 90 per cent of total debt, which is mostly raised in the open market through bonds. Moreover, inflation has been much higher than RBI projections, and the interest rate has been rising continuously. As a result, interest costs may grow faster than anticipated for the government and may hamper public investments.
The government plans to borrow a record Rs 14.31 trillion this fiscal year. As interest rates rise and the nation's debt grows, it will become even more expensive to borrow in the future.
Governor Shaktikanta Das assured us that the RBI would take the necessary steps for an orderly evolution of government borrowings. But market experts indicate inflation control versus debt management could be challenging in the coming days.
"We believe this signals that the RBI would not like rapid moves in bond yields. The RBI's simultaneous bond yield management versus liquidity withdrawal (due to inflation risks) could conflict later in the year. However, this is not a concern at this stage," Nomura, a global financial services group, said in its latest note.
