Reserve Bank of India held its Monetary Policy Committee meeting on Wednesday and closed it with a hike of 50 bps in the repo rate reaching 4.9 per cent. This is the second hike in the past two months without any hope of a hike in the growth forecast. Let’s know how this works and how it would impact us but before this let’s understand what is repo rate? 

What is Repo Rate?

The Repo rate is the rate of interest on which the RBI lends money to commercial banks. The interest earned by the RBI is invested in the economy of the nation. The raised repo rate will bring in more income to India’s central bank with improved estimated economic development and serve financial requirements globally.

Why Does a Hike in the Repo Rate Happen?

Controlling inflation can be the direct reason behind the rise in the repo rate.  When the repo rates are elevated the borrowing rate for the public also goes up. Then instead of borrowing, investments start, resulting in less money in circulation making prices cool down hence controlling the inflation.

Highlights of the Revised Plan

  • Limits on individual home loans given by urban and rural co-operative banks are being revised upwards of more than 100 per cent taking into account the rise in housing prices over the last decade.
  • Rural co-operative banks can now extend finance to commercial real estate, or loans for residential housing projects, within the limit of 5% of their total assets.
  • Urban cooperative banks will now begin doorstep banking services to customers.
  • You no longer need to give the OTP for auto-transaction of up to Rs.15,000.
  • Additional measures are announced for cooperative banks.
  • E-mandate on cards for recurring payments, limit upped from Rs 5,000 to Rs 15,000 per transaction.

Revised Rates

  • Policy repo rate hiked by 50 basis points to 4.90%
  • Policy stance to remain ‘withdrawal of accommodation’
  • The real GDP forecast for FY23 remained at 7.2%
  • RBI revises inflation projection for FY23 to 6.7 % from 5.7% earlier.

What Did Governor Shaktikanta Das Say About the Raise?

This is the second consecutive rise in the repo rate in the last two months, and here’s what the RBI Governor Mr ShaktiKanta Das has to say about it:

  1. On unregistered apps: Actions are taken against the Digital lending apps unregistered with RBI, and customers are guided to file a complaint against any fraudulent activity.
  2. On inflation target: The inflation target of 4 per cent remains the same, in case of deficit, the repo window will help. 
  3. On exports: India’s exports have performed exceptionally well, on June 3 the foreign exchange reserves were at $601.1 billion he informed.
  4. Liquidity surplus: Liquidity surplus in the market is higher than the pre-pandemic level, and continuous liquidity is ensured.

Major Effects on Common People After Revision in the Rate

Fuel price: MD Kotak AMC said the fuel prices will remain unaffected by the hike in rates. But, as a result of inflation, the prices can go high.

Retail loan: With the hike in the rate RBI lends to the banks, the banks will also charge a higher rate on retail loans making them costlier. Retail loans are normal loans given to an Individual.

  • Home loan: For each lakh rupee of loan, you may have to dole out Rs 55 extra for EMI.
  • Auto loan: the rate of interest on an auto loan will rise to 10.9% from 10%.
  • Personal loan: The interest rate on a personal loan will go to 14.9% from being at 14%.
  • Investments:  Short term investments will be affected, and your gain will dive down. Long term investments won’t be hampered apart from a short term loss for now.

Although the hike in repo rate is done to control the inflation, the Monetary Policy Committee (MPC) noted that the inflation rate will remain the same i.e. at 6% for the next three-quarters of the current rate. The good news is that the growth is expected to remain continuous irrespective of the fluctuations in the retail market.