Stock - RBI / Reserve Bank of India
The domestic market recovered from the impact of weak global cues, gaining support from positive domestic earnings led by IT and pharma stocks. Image Credit: Bloomberg

Dubai: The Indian central bank has left the base interest rate unchanged for a third straight time, at 6.50 per cent, even as the inflation rate remains at an elevated 6 per cent plus.

For Indian expats in the UAE and Gulf, the rupee could continue at or around a highly favourable 22.50 to the dirham levels in the near term.

The rupee had been inching closer to 22.5 to dirham in recent days, after being at 22.31 on August 1. Analysts suggest there could be further pressure on the Indian currency in the day ahead, and that works to an advantage for Indian expats in the Gulf. Check the latest forex rates here.

"The Indian economy is exuding enhanced strength and stability despite the massive shocks to the global economy," said Shaktikanta Das, RBI Governor, while delivering the no-change decision.

India's main stock market index, Sensex, hasn't reacted too favourably, with the gauge down more than 240 points by 11.30am. 

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This is the third successive time the Reserve Bank of India has retained the base rate at 6.5 per cent, which has risen by 250 basis points since May 2022. India, along with most of the global economies, have been fighting to keep inflation under control, and raising lending rates has been the prime tool to make that happen.

The RBI is projecting GDP growth at 6.5 per cent, and it is walking a fine line between maintaining that growth and bringing inflation under a semblance of control.

“RBI was expected to hold on to its interest rates,” said Krishnan Ramachandran, CEO of Barjeel Geojit Financial Services, based in Dubai.

India’s retail inflation has been a concern over the last few months, but is expected to moderate in the next 2-3 months.

- Krishnan Ramachandran of Barjeel Geojit Financial Services

“The housing loan market has been quite resilient despite the rate increases since May 2022. Any move by the RBI to increase rates from the present levels may bring in a temporary moderation in demand for housing loans in the near term.”

That’s not going to happen this time…

India’s property market up for ‘record year?

There is a whole lot of buying of homes happening in India right now, and which could set off a record year once the final tally shows up in late December. It’s a fact that even with a higher home financing rate scenario, demand for property has been robust.

“Except in the affordable housing segment, which has seen some impact, everything else is on a high,” said Prashant Thakur, Regional Director and Head - Research at Anarock, the consultancy that is headquartered in Mumbai. 

The highest demand is in the mid- and luxury segments, so in broad numbers, the rate increases until now haven’t made any difference.

- Prashant Thakur of Anarock

What next for the rupee?

"As the rupee rate keeps flirting with 22.50 to dirham level - which has always been a magic figure for UAE Indian expats - there was a huge volume in INR remittance transfers happening last week," said Neelesh Gopalan, analyst at a Dubai-based fintech.

"During the year, the INR-AED exchange rate has ranged between 22.58 and 22.04. "If what we are seeing in recent days persist, rupee could be heading for another all-time low."

The lowest point ever has been the 22.68, which was on October 20, 2022. 

I would not be surprised if the rupee slipped further to 22.60 range next term. From an NRI perspective, current AED-INR levels are in their favour.

- Neelesh Gopalan

Market watchers are near unanimous in saying that RBI took the right call in holding rates, for a third successive meeting. Inflation has been perking up, most notably on food prices. Oil import costs too would need careful monitoring by the time RBI's monetary policy meeting has its next meeting.

"A cautious and balanced approach would be most prudent in the wake of rising food prices and other macros,"  said Ashwin Chawwla, Managing Director at Escrowpay. "Another rate hike will dent the loan appetite for individuals and businesses.

"Loans are already running at high interest rates and have made lot of borrowers ineligible for cars and home loans. For some, interest rate hikes have extended their loan terms by default..."

A 250 basis point weight on EMI payments
Homebuyers in India have seen their EMIs shoot up 20% in the last two years. Home loan borrowers who were paying an EMI of around Rs22,700 in July 2021 are now paying about Rs27,300, according to Anarock data.

"The RBI decided to keep the repo rates unchanged at 6.5%. India continues to outperform other countries in terms of consumption and with the festive season coming up, the RBI will not risk denting it."