Reserve Bank of India, in the year’s second bimonthly monetary policy release, has announced an increase of 25 basis points(bps) in the repo rate. RBI’s Monetary Policy Committee (MPC) has hiked the repo rate to 6.25% and the reverse repo rate is now 6 %. This is the first increase since May 2014, when the BJP government had sworn in.
The Cash Reserve Ratio remains 4% and the Statutory Liquidity Ratio also stays unchanged at 19.5%.
The MPC took the decision unanimously, under the ex-officio Chairperson, the RBI Governor, Mr. Urjit R. Patel. The committee maintained a ‘neutral’ stance.
WHY HAS THE RATE BEEN HIKED?
The inflationary force in the economy is the reason behind RBI’s decision. Certain primary causes to be noted are:
•“The MPC notes that domestic economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed. Investment activity, in particular, is recovering well”, said RBI.
• A two-year high of 7.7 % GDP in the January -March quarter. While this was seen as another accomplishment of the Modi government, the consequent inflation needed to be curbed by discouraging borrowers.
• The immensely high global Crude Oil pricesin the month of May. The RBI explained one of the reasons to be, “the 12% increase in the indian crude basket, which was sharper, earlier than expected and seems to be durable.”
• The rise in India’s Consumer Price Index or Retail Inflation to 4.58 % in April.
• Increase in global commodity prices.
WHAT IS THE REPO RATE AND HOW DOES IT AFFECT US?
Repo rate is the interest rate at which RBI lends money to all the other banks in the country. This, in turn, leads to an increase in the rate at which commercial banks lend money to the common man, as the banks usually pass the burden down.
An increased repo rate would, thus, generally mean higher interest rates in bank loans.
However, SBI, PNB and ICICI Bank have already increased their lending rates (MCLR) by upto 0.1% last week. It is uncertain presently, if the 3 leading lenders in the country will choose to further increase the lending rates.
On the positive side, Increase in the repo rate also usually results in an increased interest payable by the bank to the depositors.
The move has been made as a regulatory step to control the demonic inflation in the economy and thus, is expected to bring relief.