For the sixth consecutive time, the Reserve Bank of India has raised the repo rate.
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RBI Raises Repo Rate By 25 Basis Points
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Announcing the decision today morning, RBI governor Shaktikanta Das said the RBI has raised the policy repo rate by 25 basis points in its last policy review at the MPC meeting held from 6th to 8th February 2023. The repo rate now stands at 6.5% with immediate effect.
The repo rate hike decision was taken by a majority of four out of the six members of the Monetary Policy Committee. This was the RBI’s last MPC meeting for this financial year, which ends next month on March 31. MPC has also maintained its policy stance at ‘withdrawal of accommodation’ to ensure that inflation
remains within the target going forward while supporting growth.
For the uninitiated, the repo rate is the rate at which the RBI lends money to commercial banks, whenever the latter falls short of funds or needs liquidity. The banks borrow from the RBI against qualifying securities put as collateral, such as government bonds and treasury bills. Simply put, just like we borrow from banks at the applicable interest rates on loans, banks borrow from the RBI whenever required, at the repo rate.
Previous Repo Rate Hikes By RBI
With today’s move of raising the repo rate by 25 bps, India’s central bank has cumulatively hiked interest rates by 250 bps points in its last six announcements since May 2022.
The RBI has further gone relatively easier on rate hikes for the second time since the beginning of the rate tightening cycle in May. In a surprise move, the RBI had hikes repo rate by 40 bps in May, after which it hiked it four more times, by 50 bps in June, August and September each, and then a slightly softer hike of 35 basis points in December 2022.
The relatively smaller rate hike of 25 bps this time can be attributed to softening of retail inflation and the US’s central bank Federal Reserve moderating the pace of increase in its benchmark interest rate, as per ET.
Also Read: How Loan Borrowers Can Enjoy Lower EMIs Despite RBI Rate Hikes
Loan EMIs Likely To Rise
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As the case with the previous repo rate hikes, this sixth repo rate hike too is expected to push loan EMIs further up, for both new and existing borrowers. Why?
This is because the repo rate is the rate at which the RBI lends money to commercial banks, whenever the latter falls short of funds or needs liquidity. So, when the repo rate rises, borrowing from the RBI becomes costlier for the banks. And since banks’ cost of borrowing rises, they raise their lending rates too, which is why new and existing loan borrowers’ pockets get impacted.
Contrary to the perception that loan EMIs get immediately increased whenever the RBI hikes the repo rate, the EMI changes in fact reflect the changes on the loan reset date, when the lender reviews the lending rate of the loan for existing borrowers. As far as those planning to take a loan is concerned, the rising interest rate regime has been pushing up loan EMIs over the past few quarters.
If you are planning to take a retail loan such as a home loan, car loan or personal loan, you may go ahead if you are financially prepared to do so, as the current rising rate regime does not seem to offer any respite through fall in interest rates in upcoming months.
To check if you are financially prepared to take a loan, click here.
RBI Governor Explains The Decision
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Explaining the MPC’s rationale for these decisions on the policy rate and
the stance, RBI Governor Shaktikanta Das said “The global economic outlook does not look as grim now as it did a few
months ago. Growth prospects in major economies have improved, while inflation is on a
descent, though it still remains well above the target in major economies. The situation
remains fluid and uncertain. Reflecting the recent optimism, the IMF has revised upwards
the global growth estimates for 2022 and 2023. As price pressures wane, several central
banks have opted for slower rate hikes or pauses. The US dollar has retreated sharply
from its highest level in two decades. Tighter financial conditions caused by aggressive
monetary policy actions, volatile financial markets, debt distress, protracted geopolitical
hostilities and fragmentation continue to impart high uncertainty to the outlook for the
global economy. “
“Amidst these volatile global developments, the Indian economy remains resilient. Looking ahead, while inflation is expected to moderate in 2023-24, it is likely to
rule above the 4 per cent target. The outlook is clouded by continuing uncertainties from
geopolitical tensions, global financial market volatility, rising non-oil commodity prices and
volatile crude oil prices. At the same time, economic activity in India is expected to hold
up well. The rate hikes since May 2022 are still working their way through the system. On
balance, the MPC was of the view that further calibrated monetary policy action is
warranted to keep inflation expectations anchored, break the persistence of core inflation
and thereby strengthen the medium-term growth prospects. Accordingly, the MPC
decided to raise the policy repo rate by 25 basis points to 6.50 per cent. The MPC will
continue to maintain a strong vigil on the evolving inflation outlook so as to ensure that it
remains within the tolerance band and progressively aligns with the target”, the RBI governor added.
More From RBI’s MPC Statement
For the next financial year, the RBI projected a growth rate of 6.4 per cent. RBI also projects retail inflation at 6.5 per cent for FY2022-23 which ends next month, and 5.3 per cent for the financial year 2023-24. Also, for FY2022-23, RBI has projected GDP growth at 7%. Reflecting on the current economic scenario, RBI governor Das said “Inflation is on a descent. Growth prospects in major economies have improved.”
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