In its bi-montly review, the Reserve Bank of India (RBI) decided to raise the repo rate by 50 basis points to 4.9 percent during its monetary policy meeting on June 8, 2022, following a 40-basis-point hike on May 4, 2022.?
Let us have a closer look at what this exactly means?
The repo rate is the rate at which a country's central bank (in India, the Reserve Bank of India) loans money to commercial banks in the event of a cash crisis. Short term loans like treasury bills or government bonds are provided by the Central bank itself. Monetary authorities utilise the repo rate to limit inflation.?
In the event of inflation (the rate of increase in prices over a given period of time), central banks raise the repo rate to discourage banks from borrowing from the central bank. As a result, the state's supply of money is reduced, which helps to keep inflation under control.?
A rise in the repo rate requires commercial banks to pay more interest on the amount lent to them, and thus a shift in the repo rate significantly affects public borrowings such as housing loans, EMIs, and so on. When inflationary pressures fall, the central bank takes an opposite stance.
The repo rate is decreased when there is a need to infuse more money into the market and support economic growth The liquidity adjustment facility includes repo and reverse repo rates, changes in which are expressed in terms of basis points which basically means one hundredth of one percentage point.?
This is the rate at which a country's central bank compensates its commercial banks for storing excess funds in the central bank. The central bank uses a monetary policy called reverse repo rate to control the flow of money in the market.?
When an economy requires funds, it needs to borrow from commercial banks and ends up paying the reverse repo rate as interest. The reverse repo rate issued by RBI is normally lower than the repo rate at any particular time.?
While the repo rate is used to control cash flow in the market, the reverse repo rate is used to regulate liquidity in the economy. The ease with which an investment or security can be transferred into ready cash without impacting its market value is referred to as liquidity.
When the economy is experiencing inflation, the RBI raises the reverse repo rate to encourage commercial banks to deposit money with the central bank and earn interest. As a result, excess funds are absorbed from the market, reducing the amount of money available for public borrowing.
As a result of the current rise, deposit rates are expected to climb in the next months, forcing banks to raise their deposit rates. After the RBI boosted repo rates by 40 basis points in May, many banks have already raised deposit rates.?
The growth rate shall remain stable. India's growth prediction of 7.2 percent has been maintained by the RBI's policy panel. On May 31, the National Statistical Organisation forecasted an 8.7% growth rate for India in 2021-2022.?
Long-term geopolitical uncertainties, high commodity prices, supply constraints, and tightening global financial conditions all weigh on the forecast, according to RBI Governor Shaktikanta Das.
However, the Monetary Policy Committee (MPC) has expressed concern about inflation, stating that it is expected to remain above the upper tolerance level of 6% through the first three quarters of 2022-23. The RBI is expected to take more rate action as a result of this. Inflation is now expected to be 6.7% in 2022-23, according to Das.
Since banks and NBFCs are expected to lift loan rates, the result will also have a significant impact on borrowers who are planning to take out a personal loan, a home loan, a car loan, or a gold loan in the coming months. Borrowers will be required to pay increased EMIs as loans become more expensive due to the repo rate upsurge.
A rise in these percentages implies that housing loans and EMIs become more expensive. Those who chose floating EMIs may have to pay more until the RBI lowers interest rates. When the RBI raised the repo rate last month, major financial institutions like HDFC, SBI, and Punjab National Bank raised property owners' EMIs.
Moreover, the policy withdrawal and repo rate increase are expected to impact the economy's demand and . The effect is expected to be more evident in non-discretionary consumer expenditure.
The word "accommodative" was excluded from policy stance by the RBI. The RBI's policy board has opted to continue the focus on withdrawing accommodation in order to keep inflation within the target range.
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