This is the sixth time the repo rate has been hiked by the Reserve Bank of India since May last year, with the latest hike taking the total hike to 250 basis points.
The Monetary Policy Committee (MPC) of the Reserve Bank of India on Wednesday raised the key policy rate, the repo rate or the rate at which the RBI lends money to banks, by 25 basis points to 6.50 percent. Retail inflation. Loans linked to all external benchmarks (based on the repo rate) are expected to become costlier immediately with the RBI decision.
The RBI has also projected a GDP growth rate of 6.4 percent for the next financial year. The MPC said retail inflation is expected to be 5.3 percent in FY24.
Was the decision to increase rates taken unanimously?
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 Jayant R. Verma voting against the increase.
In a 4:2 majority decision, the MPC retained the stance of withdrawing adjustments to ensure that inflation remains within the target while supporting growth. Goyal and Verma also voted against withdrawing the accommodation.
What will be the effect?
The lending rates of banks are expected to increase as the cost of funds is expected to increase further. EMI on the vehicle, home, and personal loan will also increase. The External Benchmark Linked Lending Rate (EBLR) of banks will increase by 25 bps – a basis point is one-hundredth of a percentage point – as such loans are linked to the repo rate. 43.6 percent of the total debt is now linked to the repo rate.
The marginal cost of funds-based lending rates (MCLR), which account for 49.2 percent of banks’ loan portfolios, are also expected to increase. The hike will help bring down inflation in the country.
An SBI official said that deposit rates may also see some improvement.
Growth so far
The RBI has elevated the repo price with the aid of a cumulative 250 foundation points to 6.50 percent for the reason that May this year.
In December 2022, the MPC hiked the repo rate by 35 basis points to rein in retail inflation. The MPC hiked the repo rate by way of forty bps in May and then through 50 bps in three consecutive meetings.A groundwork point is one-hundredth of a proportion point.
The RBI has estimated the GDP growth for the next financial year (FY2024) at 6.4 percent. The MPC cut the GDP forecast for FY23 to 6.8 percent from the earlier estimate of 7 percent in the December policy review, as risks from prolonged geopolitical tensions, global recession, and tightening of global financial conditions loom large Continues.
The central bank has slashed the inflation target for FY23 to 6.5 percent from 6.7 percent – which is still above the RBI’s comfortable level of four percent. Inflation is estimated to be 5.3 percent in FY24.
Inflation for the fourth quarter of FY23 at 5.7 percent as against 5.9 percent.