- Date : 08/06/2022
- Read: 2 mins
The Reserve Bank of India (RBI) has hiked the repo rate by 50 bps. The move is an attempt to counter the increasing inflation rate in India.
The Monetary Policy Committee (MPC), chaired by RBI Governor Shaktikanta Das, voted unanimously to raise the repo rate by 50 basis points, taking it to 4.9%. This was the second repo rate hike in five weeks to counter increasing inflation. Earlier in May, the MPC held an unscheduled review and voted for 40 basis point hike in anticipation of higher inflation levels for April 2022.
How will this repo rate hike impact consumers?
By increasing the repo rate, the RBI is able to reduce liquidity with an expectation of clamping down inflation and smoothening economic growth. The repo is the rate at which other banks borrow funds from the RBI. The repo rate impacts the banks' base lending rate and ergo cost of credit products for other commercial/retail borrowers.
Every time there is a revision in the repo rate, it directly impacts existing borrowers loan EMI or in most cases, readjust for a longer tenure. With the current hike, repo rate-linked lending rate (RLLR) will go up, making all new home loans, personal loans, car loans and other business loans expensive. Conversely interest rates on fixed deposits will also go up thereby encouraging savings.
Along with the repo rate latest hike, the Standing Deposit Facility and Marginal Standing Facility rates have been raised by 50 basis points, which are now at 4.65% and 5.15%, respectively.
What can be expected going forward?
For the last few months, inflation has hovered over 6%, which is above RBI’s safe zone. A higher inflationary pressure could subvert an otherwise bullish economy. A lot of the excess inflation can be attributed to global factors such as the Russia-Ukraine conflict and supply chain issues.
As per RBI’s forecast earlier this financial year, retail inflation is expected to average 6.3% for the quarter April to June, 5.8% from July to September, 5.4% from October to December and 5.1% for the last quarter from January to March 2023.
Amidst the rising inflation, the RBI has maintained its stance of strong overall GDP growth of 7.2%, and experts believe that it is very likely the Central Bank may consider another repo rate hike of 25 basis points during the scheduled August meeting of the MPC.