Announcement : The MPC has announced a repo rate hike of 35bp making the current rate to 6.25%. This rate hike was confirmed by the RBI governor Shaktikanta Das at 10 am on 7 Dec 2022.
The Reserve Bank Of India (RBI) convened a Monetary Policy Committee (MPC) meeting on 5 Dec 2022. The result of this meeting is expected to be an increase in the Repo Rate by 35 bases points.
Shaktikanta Das, the RBI governor is expected to announce the repo rate hike for this year in order to check inflation on 7 Dec 2022.
The repo rate is the interest rate at which the Reserve Bank Of India (RBI) loans money to commercial banks. Repo is an abbreviation for Repurchase Agreement or Repurchasing Option. When banks are short on funds or need liquidity they take loans from the Reserve Bank of India (RBI) by selling qualifying securities. The central bank or RBI and the commercial banks reach an agreement to repurchase the securities at a set price.
The repo rate is used as a tool to control the flow of money by the RBI. It is hence utilised by the RBI to manage inflation. By increasing the repo rate that is the rate at which the Central Bank lends money to the commercial banks , the RBI restricts the borrowing of money. This in turn forces the commercial banks to lend less money to the public, reducing the availability of cash in the market. This shortage of cash in the market reduces the demand for goods and services and thus reduces inflation. The RBI regulates the repo rate based on the economic condition of the country. It decides the interest rate whether during a recession or during an inflation.
The current repo rate is 5.90%. It was last increased in September 2022 by 50 bases points. This year the RBI has increased the repo rate four times by 50 bp each time. We are expecting an increase of 25 to 35 bp this time.
May 2022 was 4.40%
June 2022 was 4.90%
August 2022 was 5.40%
September was 5.90%
Although the economic growth indicators are improving, the inflation has been consistently above 6% which is the comfort threshold of the RBI . Several external factors like the Russia Ukraine war, rise in crude oil prices etc have kept the inflation high this year. The rupee is depreciating because of low exports and this is a major concern for the Indian economy. The repo rate hike this year has been steep, making it over 2% including the latest expected hike. Economists are saying that a repo rate of 6.25% will help control inflation without hurting economic growth. The RBI is strategizing to bring the inflation rate below 6% as soon as possible with this trade off.
The Effects Of The Repo Rate Increase On People
- The direct impact of a repo rate increase is on Home loan borrowers with floating rates. Commercial banks will increase the loan rates as soon as the repo rate increase is confirmed. This will increase the EMIs and tenures of the existing loans.
- Reduction in sale of goods and services as consumers will have less cash available. The borrowing power of consumers will reduce due to the interest rate hike and hence the consumers will have lesser purchasing power.
- The interest rate hikes will be beneficial for those who have savings and fixed deposits.
Announcement : The MPC has announced a repo rate hike of 35bp making the current rate to 6.25%. This rate hike was confirmed by the RBI governor Shaktikanta Das at 10 am on 7 Dec 2022.
As on 7 Dec 2022 the repo rate is the highest since Aug 2018.
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