Source : INDIA TODAY NEWS
The Reserve Bank of India’s Monetary Policy Committee (MPC) is set to announce its latest interest-rate decision today, with markets widely expecting a 25 basis points (bps) hike in the repo rate.
If delivered, it would be the first rate increase in four years, taking the benchmark rate from 5.25% to 5.50%. RBI Governor Sanjay Malhotra will announce the decision at the end of the MPC meeting at 10 am.
advertisement
While the expected hike this time is relatively small, the RBI has taken much more aggressive steps in the past. The central bank’s policy rate touched 16% in August 2000, a level far above anything seen in recent decades.
There is, however, an important historical distinction. The 16% rate is often described as the highest repo rate in historical rate tables, but the RBI actually referred to the rate as the “reverse repo rate” at the time. The terminology was changed on October 29, 2004.
So, why did the RBI take its policy rate all the way to 16% in 2000?
The decision came at a time when India was facing a combination of external and domestic financial pressures. Three factors stood out: a sharp rise in crude oil prices, pressure on the rupee and selling by foreign institutional investors (FIIs).
EXPENSIVE CRUDE OIL
One of the biggest problems was the sharp rise in international crude oil prices.
India was, as it is today, heavily dependent on imported oil. The rise in crude prices meant Indian oil companies needed more foreign currency to pay for imports.
According to an RBI statement from the period, the average price of Brent crude had risen to $32.97 a barrel in September 2000, from $25.55 in December 1999 and $22.51 a year earlier.
The higher oil bill increased demand for dollars at a time when the foreign exchange market was already under pressure.
RUPEE UNDER PRESSURE
The second major problem was the rupee.
Higher oil prices increased demand for dollars, while global conditions were also making the external environment tougher for India. The RBI said the rupee depreciated 5.3% against the US dollar between April and September 2000.
The pressure on the currency also came as US and European interest rates were rising, while capital inflows into India weakened. India’s foreign currency assets fell by $2.5 billion during the first six months of 2000-01, according to the RBI.
A higher interest rate was one of the tools available to the central bank to make rupee assets relatively more attractive and help stabilise financial conditions.
FII SELLING ADDED TO THE PRESSURE
The third factor was a sharp reversal in foreign institutional investor flows.
The RBI said there was uncertainty over the prospects of the Indian equity market, leading to a reversal in FII flows. Between May and August 2000, FIIs recorded a net outflow of $505 million, compared with a net inflow of $948 million in the first quarter of the calendar year.
That meant India was facing greater demand for foreign currency at a time when the supply of dollars was under pressure. The RBI responded with a combination of measures, including using foreign exchange reserves, tightening the cost of financing for some imports and raising interest rates to improve the interest-rate differential between dollar and rupee assets.
WHY DID RBI GO AS HIGH AS 16%?
The 16% rate was therefore not the result of one single inflation problem. It came amid a broader external-sector squeeze, with expensive crude oil, a weakening rupee and FII outflows putting pressure on India’s foreign exchange market.
The RBI used several tools at the time, including intervention in the currency market and liquidity measures, alongside interest-rate action. The very high policy rate was part of this broader effort to deal with the pressure on the rupee and capital flows.
The rate did not remain at 16% for long. The historical timeline shows it at 16% on August 9, 2000, before being cut to 15% later that month and then to 13.5% in September.
HOW HAS THE RBI RATE MOVED SINCE 2000?
The 16% rate was an extreme point in the RBI’s rate history, and the policy rate subsequently moved through several distinct cycles depending on inflation, growth, global financial conditions and crises.
Reuters’ historical timeline of the RBI’s policy rate since June 2000 shows the broad trend. After touching 16% in August 2000, the rate was brought down to 10% by November that year and 9% by March 2001. It fell further to 8% in March 2002 and 6% in March 2004.
The RBI then began raising rates again as inflationary pressures increased. The rate reached 7.75% in 2007 and 9% in July 2008, before the global financial crisis prompted a sharp reversal. It was brought down to 4.75% by April 2009.
The next major tightening cycle came in 2010-11, when the rate was raised from 5% in March 2010 to 8.5% by October 2011. It subsequently moved between 7% and 8% through much of the next few years, touching 8% again in January 2014.
The rate was gradually reduced thereafter, falling to 6.25% in 2016 and 6% in 2017. It rose again to 6.5% in 2018 and was then cut sharply during 2019 as the RBI shifted towards supporting growth.
The Covid-19 pandemic brought another major rate-cutting cycle. The repo rate was reduced to 4% in May 2020, its lowest level in the Reuters timeline.
As inflation rose sharply after the pandemic, the RBI reversed course. The rate climbed from 4% in May 2020 to 6.5% by February 2023, where it remained for several months. It was eventually reduced to 6.25% in February 2025 and then to 5.25% in December 2025.
That puts the expected 25 bps hike today into perspective. Even if the RBI raises the repo rate to 5.50%, it would still be far below the 16% policy rate seen in 2000.
– Ends
SOURCE :- TIMES OF INDIA
