India can absorb a cumulative 50-basis-point increase in interest rates over the next six months without disrupting economic activity, Parag Thakkar, head and fund manager at Fort Capital, told NDTV Profit.
Thakkar said the increases should come in two steps of 25 basis points each, rather than through a single move. "In my view India can afford 50 bps rate hike, not at one go. 25 plus another 25. Till then India's consumption, economy, capex, everything will hold on, Thakkar said.
Thakkar said a 25-basis-point repo rate increase, without a rise in the cash reserve ratio (CRR), alongside measures to attract foreign exchange inflows, is positive for banks. "In my view, 25 bps rate hike with no CRR and some measures to bring in forex and the fact that we are starting the rate hike cycle if crude oil does not stay $105-110 for long, it will be positive for banks margin which were under pressure in the last one and half year because of repo rate cuts."
Higher repo rates could support bank margins, which he said had faced pressure over the past year and a half following rate cuts. That outlook would depend on crude oil not staying in the $105–110 range for an extended period.
However, he warned that increases exceeding 50 basis points over the next six to nine months would pose a problem for the Indian economy, particularly if rising crude prices and global developments forced further tightening.
"If we have to increase interest rates above 50 bps in another 6-9 months, then you have a real problem. That is Indian economy will function normally, demand will remain and there will be no asset quality issues and everything will get absorbed if there is 50 bps rate hike cycle in the next 6 months. If we have to raise above 50bps due to riding crude prices and global issues then, we are also in a problem," Thakkar concluded.
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RBI MPC's Decision
The Reserve Bank of India raised its benchmark interest rate by 25 basis points to 5.50% on Wednesday, its first increase in nearly four years, and signalled that further hikes could follow as rising inflation and a weakening currency prompt a policy pivot.
The six-member Monetary Policy Committee voted unanimously to raise the repo rate, the first such increase since Governor Sanjay Malhotra took office in December 2024. While the move was widely expected, the central bank sprang a surprise in shifting its stance towards "calibrated tightening", effectively ruling out a rate cut in the near term.
The governor, however, cautioned, that the timing and extent of any further tightening would depend on the evolution of inflation and growth, particularly underlying price pressures and the extent to which supply shocks become embedded in the broader economy.
With the decision, India has joined major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation, squeeze purchasing power and weigh on currencies.
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