The Monetary Policy Committee (MPC) of the Reserve Bank of India on Wednesday hiked 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 control retail inflation. This decision is based on an assessment of the macroeconomic situation and its outlook, decided by a majority of 4 members out of 6 headed by Reserve Bank of India Governor Shaktikanta Das.
Repo is the rate at which Reserve Bank of India lends funds to commercial banks when needed. It is a tool that the central bank uses to control inflation. This is the third hike since the beginning of the current financial year, taking the rate is back to pre-pandemic levels in order to tame the inflationary pressure.
IMPACT OF THE INCREASE IN REPO RATE
- Impact on Economic Growth
Successive rate raises over a relatively brief period are expected to have an unplanned negative effect on economic growth, even though these measures are essential to tackle inflation. Due to the rise in the RBI monetary policy repo rate, people may purchase increasingly fewer goods and services, which could potentially affect demand and, in turn, slow growth. As a result, as everything becomes more expensive, goods and services may no longer be within the means of the underprivileged sections of society
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Impact on Loans & EMIs
When banks increase interest rates, existing borrowers may see an increase in their monthly loan payments, which may discourage them from buying a home. The increase in the Reserve Bank of India’s interest rate affects all types of loans, including mortgages, car loans, student loans, personal loans, business loans, credit cards, etc. An increase in interest rates makes borrowing from banks more costly, affecting all consumers.
- Impact on Deposits & Fixed Deposit Rates
An increase in the interest rates for bank deposits is usually positive when the repo rate goes up. However, the spread of the interest rate increase may be slower. It is expected that eventually, banks will raise their deposit interest rates. Experts claim that those with short- to medium-term investments like fixed deposits and savings accounts may benefit from higher rates as they receive higher returns on their investments, depending on how banking institutions adopt the new interest rate hike.
The recent string of interest rate increases by the Bank of England, the European Central Bank, and the US Federal Reserve, and their impact on the foreign exchange market, led the Reserve Bank of India to make another interest rate hike. Unless there is a sudden surge in inflation, it is likely that the Reserve Bank of India will keep its policy rate unchanged for the rest of 2023, which would be beneficial for both the debt and equity markets.