RBI hikes Repo rate by 25 bps to 6.5%, what impact will this have?
Context- The Monetary Policy Committee (MPC) of the Reserve Bank of India on Wednesday hiked the key policy rate, the Repo rate or the rate at which the RBI lends funds to banks, by 25 basis points to 6.50 per cent in a bid to rein in retail inflation. The RBI decision is expected to make all external benchmark linked (based on the Repo rate) loans costlier immediately.
The RBI has also projected a GDP growth for the next fiscal at 6.4 per cent. Retail inflation is expected to be 5.3 per cent in FY24
Was the decision to hike rates unanimous?
- It was a 4:2 majority decision by the RBI’s policy panel to hike the Repo rate, the sixth since May 2022, with MPC members Ashima Goyal and Jayanth R. Varma voting against the increase.
- In a majority 4:2 decision, the MPC also retained the stance on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Goyal and Varma also voted against the withdrawal of accommodation.
What will be the impact?
- Lending rates of banks are expected to go up as the cost of funds is expected to rise further. EMIs on vehicles, home and personal loans will also rise.
- The external benchmark linked lending rate (EBLR) of banks will rise by 25 bps — one basis point is one-hundredth of a percentage point— as such loans are linked to the Repo rate. As much as 43.6 per cent of the total loans are now linked to the Repo rate.
- Marginal cost of funds-based lending rates (MCLR), which accounts for 49.2 per cent of the loans portfolio of banks, are also expected to move up. The hike will help in moderating inflation in the country.
- Deposit rates are also expected to witness some realignment
The hike so far
- The RBI has increased the repo rate by a cumulative 250 basis points to 6.50 per cent since May this year.
- In December 2022, the MPC hiked the Repo rate by 35 basis points in a bid to rein in retail inflation. The MPC hiked the repo rate by 40 bps in May and then by 50 bps in each of the three successive meetings.
- A basis point is one-hundredth of one percentage point.
Growth projection
The RBI has projected GDP growth for the next fiscal (FY2024) at 6.4 per cent. The MPC had slashed the GDP forecast for fiscal 2023 to 6.8 per cent in the December policy review from an estimate of 7 per cent earlier as risks continue to emanate from protracted geopolitical tensions, global slowdown and tightening of global financial conditions.
Inflation forecast
- The central bank has lowered the inflation target for FY23 from 6.7 per cent to 6.5 per cent – which is still above the RBI’s comfort level of four per cent. Inflation is expected to be 5.3 per cent in FY24.
- Inflation for Q4 of FY23 at 5.7 per cent as against 5.9 per cent.
How has the market responded?
- The benchmark Sensex was trading around 261 points, 0.43 per cent, higher at 60,547.32, and the NSE Nifty by 96 points at 17,817 at 10.55 am IST.
- “This (hike) is known to the market and is unlikely to have any meaningful impact on the market. The important trends impacting markets globally are the developments in the US economy and rate action by the Fed,”said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
What is repo rate, reverse repo rate and bank rate?
Repo Rate- It is the interest rate at which the central bank of a country lends money to commercial banks. If repo rate goes up, banks charge customers and businesses a higher interest rate.
Reverse Repo Rate- It is the rate at which banks earn interest when they park surplus funds with the RBI. The repo rate set by the RBI is always higher than the reverse repo rate.
Bank Rate- It is the interest rate at which the central bank of a country lends money to commercial banks, however, no collateral is involved in bank rate (While in Repo rate RBI purchases securities from banks while giving loan). Repo Rate is always lower than the Bank Rate.
Way Forward- Growth concerns need to be adequately factored into, while going for increasing key policy rates.
Source- Indian Express
Syllabus- GS-3; Economy; RBI