RBI hikes Repo rate by 25 bps

What’s in today’s article?

• Why in news?
• News Summary: RBI hikes Repo rate by 25 bps
• The hike so far
• Key announcements
• What will be the impact of recent rate hikes?
• Why the latest monetary policy review was significant?

 

Why in news?

• The Monetary Policy Committee (MPC) of the Reserve Bank of India hiked the Repo rate by 25 basis points [100 basis points (bps) = 1 percentage point] to 6.50 per cent in a bid to rein in retail inflation.
  • Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
  • MPC determines the policy interest rate required to achieve the inflation target.
• 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.

 

News Summary: RBI hikes Repo rate by 25 bps

• In its first Monetary Policy statement of 2023, the RBI hiked the policy repo rate by 25 basis points to 6.5%.
  • Repo rate is the rate at which the RBI lends money to banks to meet their short-term funding needs.
• The decision to raise the repo rate was approved by a 4-2 majority by the central bank's Monetary Policy Committee (MPC).

 

The hike so far

• The RBI has increased the repo rate by a cumulative 250 basis points to 6.50 per cent since May 2022.
• Present hike was the sixth straight hike to the repo rate, which, in December 2022, was raised by 35 basis points to 6.25%.

 

Key announcements

• Increase in repo rate
  • RBI decided to increase the policy repo rate by 25 basis points to 6.5 per cent.
    • This increase in the interest rate is lower than the earlier aggressive hikes of 35-50 bps. 
    • This signalled the MPC’s view that inflation has moderated faster than anticipated.
  • Retail inflation has been outside RBI’s comfort zone of 2% to 6% for 10 of the past 12 months.
  • Hence, RBI’s stance has been focussed on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
• RBI’s outlook for India’s economic growth & Inflation
  • RBI expects that India’s GDP will grow by 6.4% in FY24 — however, the growth rate will slow down in each quarter through the year.
    • Real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.0 per cent; and Q4 at 5.8 per cent.

Image caption: RBI’s GDP Forecast

• The RBI expects retail inflation to be 5.3% through 2023-24 — and to not fall below 5% in any of the four quarters.
• A specific worry for RBI continues to be the core inflation rate (or the rate of inflation when prices of food and fuel are taken out of the calculation). 
  • Core inflation is hovering around 6%, and signifies that high food and fuel prices have now seeped into the broader economy.
• Bringing down high core inflation typically takes more time than controlling headline inflation because food and fuel prices often come down just as sharply as they go up.

 

What will be the impact of recent rate hikes?

• Impact on banks
  • When the repo rate rises, it becomes more expensive for banks to borrow from the central bank.
  • Hence, it will affect the banking activities.
• Impact on consumers
  • Banks often pass on the increased cost to their customers in the form of higher interest rates on loans.
  • Hence, 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, as such loans are linked to the Repo rate.
• Impact on inflation
  • Since money supply in the economy would become costlier, the rate hike will help in taming the inflation.

 

Why the latest monetary policy review was significant?

• The latest monetary policy review was significant for a variety of reasons:
  • It came just after the presentation of the Union Budget, which is the most important fiscal policy document of the year.
  • It came at a time when Indian markets are roiled by uncertainty in the wake of the Hindenburg Research allegations against the Adani Group.
  • Central banks around the world are currently either slowing down the pace of interest rate increases, or even considering halting monetary tightening. 
  • This was the last review of the current financial year (2022-23). Hence, it gave a glimpse of how the RBI saw the Indian economy panning out in the next financial year (2023-24).

 

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Q1) What is repo rate?

Repo rate is the interest rate at which the RBI lends to banks in the country. The repo rate increases are intended to make credit costlier; banks generally pass on the increased costs to customers and loans become costlier.

 

Q2) What is monetary policy?

RBI’s monetary policy is a collection of financial tools and measures to safeguard and promote economic growth. According to the RBI, it conducts monetary policy with the “primary objective of maintaining price stability while keeping in mind the objective of growth.”

 

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Source: RBI hikes Repo rate by 25 bps to 6.5%, what impact will this have?  |  Times of India  |  Hindustan Times  |  Indian Express