The Reserve Bank of India (RBI) is set to hike interest rates on Wednesday, after an off-cycle increase last month to combat runaway inflation.
Banks were quick to pass on that RBI rate hike in May by increasing their lending and deposit rates.
While banks take time to pass through any rate cuts, the transmission of hikes is almost always immediate.
That suggests, banks would pass on the RBI’s expected rate lift-off onto customers before the turn of the week.
In turn, that is going to push the equated monthly instalments on loans higher, adding to the burden of the common folk, who are already reeling from surging prices of goods.
Prices have risen across the board, from food to services, and the expected increase in interest rates is going to weigh on the already-stretched monthly household budget.
That is the dilemma the RBI faces.
Indeed, while stagflation risks are turning into a reality, the RBI’s hands are forced to take rates higher.
The central bank faces the dilemma of battling surging inflation without hurting economic growth.
Still, the RBI, in its own admission, hiked last month after an emergency meeting to spread out the rate increases.
RBI Governor, Shaktikanta Das last month had said the expectations for rate hikes this month and at the next meeting, were a “no brainer.”
But he acknowledged the central bank’s tough balancing act – bringing inflation down without impacting the nascent recovery from the pandemic-led economic slowdown.