RBI Repo Rate Hike

The Reserve Bank of India increased the repo rate from a historic low of 4% to 4.40 percent in an unexpected decision and indeed has been the first time rise since August 2018. This is also the first time the RBI's monetary policy committee (MPC), led by the governor, has met to discuss raising interest rates. The Reserve Bank of India will not change its stance on policy. The central bank hiked the repo rate and the cash reserve ratio as part of its anti-inflationary policies. Another excellent tactic was to announce policy changes that influence both the rate and the level of available liquidity at the same time. It has been observed when the market reacts more strongly to its liquidity operations, the central bank's credibility and reputation are enhanced.

According to this interpretation, the RBI has evolved into a more powerful central bank that controls inflation by freeing two birds with one key. The surprise announcement of a mid-term rate hike by the RBI Governor deviates significantly from historical norms. Banks must now deposit more money with the RBI, reducing their ability to lend to individuals and companies. The Reserve Bank of India (RBI) raised the cash reserve ratio (CRR) to 4.5 percent, a rise of 50 basis points, the move will help in withdrawing 87,000 crores of liquidity from the market.

Impact foreseen:

Inflationary pressures are intensifying, particularly in the food industry. The prices should not stay at this level for a prolonged time frame, and for the Indian economy to hold strong on its road to sustainable and inclusive development, inflation must be brought under control. According to the Reserve Bank of India, the increase in gasoline and food prices has been beyond the 2-6 percent comfort zone for three months in a row, owing to the crisis in Ukraine and persistent pandemic-related supply chain disruptions. Inflation hit a 17-month high of 6.95 percent in March, and it is anticipated to stay over.

The MPC is expected to raise the repo rate by at least 25 basis points at its June, 22 meeting. The MPC determined that the inflation prediction necessitated a quick and appropriate response through firm and measured efforts to ensure that the economy's second-round effects of supply disruptions were controlled.

RBI Repo Rate Hike: Reason

The Reserve Bank of India increased the repo rate on purpose to combat inflation and its current impact on the economy. Because of the RBI's unexpected move to increase the repo rate, banks will increase loan interest rates. As a result, home and car loans are likely to increase in cost. If one is thinking about getting a loan, then one should do so as soon as possible because interest rates are projected to jump soon. Customers who take up a home loan will have to pay slightly higher interest than they would otherwise due to the change in the repo rate. Banks have started revising their lending rates. To name a few, with effect from May 4, 2022, ICICI Bank modified its external benchmark lending rate. The repo-linked lending rate (RLLR) of PNB has been raised by 40 basis points. The new RLLR, however, will take effect for existing customers on June 1, 2022, and for new consumers, it was implemented on May 7, 2022.

The hike in the repo rate is also bad news in the context as banks and nonbank financial institutions (NBCFs) rise in the lending interest rates, which will result in higher EMIs. All loans, whether for a house, a car, or a personal loan, will be affected by the most recent policy decision.

This adjustment is unlikely to have a big impact on the home loan market because various other factors, such as demand and supply, as well as buyers, play a key role in determining rates. The repo rate hike, on the other hand, may have an impact if the rate continues to remain high. The repo rate increase, on the other hand, is welcome news for investors who have been experiencing negative real interest rates on their investments. Fixed-income investors will gain from earnings on saving products such as bank and NBFC deposits and small savings schemes. Because the economy is still recovering, the RBI cannot afford to pursue severe monetary tightening like other advanced economies. While the investment cycle is showing indications of recovery, personal consumption has yet to rise significantly above pre-pandemic levels. External risks such as continued geopolitical tensions, high commodity prices, and China's slowdown threaten growth, prompting RBI to keep its liberal policy in place.