RBI latest news: RBI increases repo rate in India with immediate effect

RBI has increased the repo rate by 40 bps to 4.4% and the CRR by 50 bps to 4.5%.

Everything you need to know about RBI Repo Rate hike

The Monetary Policy Committee (MPC) of The Reserve Bank of India announced an increase in the repo rate by 40 basis points to 4.4%. Simultaneously, the RBI has also hiked the Cash Reserve Ratio (CRR) by 50 basis points to 4.5%, while the Standing Deposit Facility Rate and Marginal Standing Facility Rate have been changed to 4.15% and 4.65%, respectively. RBI Governor Shaktikanta Das announced that the changes will take effect immediately.

Also Read: How To Manage Your Investments During A Rising Rate Cycle 

Why has the RBI increased the repo rate? 

This is the first time the Central Bank has hiked the key repo rate since August 2018. The MPC has taken an accommodative stance, wherein it aims to manage interest rates to support growth and keep inflation within target, which has increased to a 17-month high since domestic activity scaled up post-pandemic lows.

The persistent inflationary pressure will have an impact on everyday goods such as fuel and food items. The Russia-Ukraine conflict, depreciating Rupee, and the higher trade deficit have further exacerbated inflation levels which touched an all-time high of 6.95% in March 2022. Mr. Das specified that if the prices remain high for too long, expectations become unanchored. ‘Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth,’ he added. The hike in CRR, which mandates banks to park funds with the Central Bank, will further suck liquidity from the banking system to the tune of Rs 87,000 crore.

Also Read: Best Rates For Bank Fixed Deposits To Invest In India 

How does this RBI rate hike impact you? 

All banks have to mandatorily link their floating-rate retail loans to an external benchmark as prescribed by the Financial Benchmark India Private Ltd (FBIL). Most banks have their debt products linked to the repo rate. The interest rate applicable to borrowers is calculated basis the current repo rate of RBI plus a margin for the bank, which includes credit risk premium and other added costs.2 

The RBI repo rate hike will force banks to increase overall interest rates across all categories of loans, both secured and unsecured. The borrowing costs for home loans, car loans, and personal loans will go up. While the loan interest rates will go up for new applicants, existing borrowers will see their loan tenures increasing for long-term loans such as mortgages or term loans. 

Also Read: 6 Ways To Reduce Home Loan EMI 

The hike for floating rate loans will be immediate; however, that for fixed rate loans will take some time to take effect as banks work on their Marginal Cost of funds Lending Rate (MCLR).  

The silver lining to this change is that the hike will also translate into higher FD interest rates, as well as higher returns on other small savings schemes such as the National Savings Certificate, Post Office Monthly Income Scheme, Public Provident Fund, Kisan Vikas Patra, and Sukanya Samriddhi Yojana, amongst others.

The Monetary Policy Committee (MPC) of The Reserve Bank of India announced an increase in the repo rate by 40 basis points to 4.4%. Simultaneously, the RBI has also hiked the Cash Reserve Ratio (CRR) by 50 basis points to 4.5%, while the Standing Deposit Facility Rate and Marginal Standing Facility Rate have been changed to 4.15% and 4.65%, respectively. RBI Governor Shaktikanta Das announced that the changes will take effect immediately.

Also Read: How To Manage Your Investments During A Rising Rate Cycle 

Why has the RBI increased the repo rate? 

This is the first time the Central Bank has hiked the key repo rate since August 2018. The MPC has taken an accommodative stance, wherein it aims to manage interest rates to support growth and keep inflation within target, which has increased to a 17-month high since domestic activity scaled up post-pandemic lows.

The persistent inflationary pressure will have an impact on everyday goods such as fuel and food items. The Russia-Ukraine conflict, depreciating Rupee, and the higher trade deficit have further exacerbated inflation levels which touched an all-time high of 6.95% in March 2022. Mr. Das specified that if the prices remain high for too long, expectations become unanchored. ‘Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth,’ he added. The hike in CRR, which mandates banks to park funds with the Central Bank, will further suck liquidity from the banking system to the tune of Rs 87,000 crore.

Also Read: Best Rates For Bank Fixed Deposits To Invest In India 

How does this RBI rate hike impact you? 

All banks have to mandatorily link their floating-rate retail loans to an external benchmark as prescribed by the Financial Benchmark India Private Ltd (FBIL). Most banks have their debt products linked to the repo rate. The interest rate applicable to borrowers is calculated basis the current repo rate of RBI plus a margin for the bank, which includes credit risk premium and other added costs.2 

The RBI repo rate hike will force banks to increase overall interest rates across all categories of loans, both secured and unsecured. The borrowing costs for home loans, car loans, and personal loans will go up. While the loan interest rates will go up for new applicants, existing borrowers will see their loan tenures increasing for long-term loans such as mortgages or term loans. 

Also Read: 6 Ways To Reduce Home Loan EMI 

The hike for floating rate loans will be immediate; however, that for fixed rate loans will take some time to take effect as banks work on their Marginal Cost of funds Lending Rate (MCLR).  

The silver lining to this change is that the hike will also translate into higher FD interest rates, as well as higher returns on other small savings schemes such as the National Savings Certificate, Post Office Monthly Income Scheme, Public Provident Fund, Kisan Vikas Patra, and Sukanya Samriddhi Yojana, amongst others.

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