Speaking about the impact of higher interest rates, Setty said, “Interest rates will definitely influence the composition as well as the quantum of credit demand, though not necessarily immediately. I think the impact will become evident as we go forward. If we see another rate hike in December, rate-sensitive sectors, particularly those linked to discretionary spending and borrowing, will probably see moderation in demand.”
“One of the important things to recognise is that we are entering a rate-hike cycle with robust credit growth. We have a rate hike as well as a projected growth rate of 7.1 per cent. This means there will be sustained credit growth driven by demand for credit from the real economy”. “As I mentioned, if there are one or two rate hikes, discretionary consumption demand and consumption credit will probably be affected. However, I don’t think demand for credit for productive activities will weaken.”
RBI raises repo rate amid inflationary pressures
Setty’s remarks come after the RBI raised the repo rate by 25 basis points to 5.5 per cent from 5.25 per cent at its October monetary policy meeting, shifting its stance from ‘neutral’ to ‘calibrated tightening’.
The Monetary Policy Committee (MPC) unanimously decided to raise the rate amid rising inflationary pressures. The RBI raised its FY27 consumer price index (CPI)-based inflation forecast to 5.2 per cent from 5 per cent, citing higher food and fuel inflation, a pickup in core inflation, a deficient monsoon, strong El Niño conditions and elevated energy and commodity prices.
RBI Governor Sanjay Malhotra said further rate decisions would depend on the trajectory of inflation and economic growth, the extent to which price pressures broaden, and the pace at which supply shocks feed through to prices. The central bank also raised its FY27 real GDP growth forecast to 7.1 per cent from 6.7 per cent, citing strong private consumption and investment, a rebound in merchandise exports and sustained growth in services exports.
On the external risks to the economic outlook, Malhotra said the ongoing West Asia conflict continued to pose risks to domestic economic activity through energy prices and supply chain pressures. A deficient south-west monsoon and strong El Nino conditions could also weigh on agriculture and rural demand, although adequate foodgrain stocks and government interventions were expected to cushion the impact.
