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With inflation staying sticky, the Reserve Bank of India raised the repo rates by 50 basis points (bps) to 5.90% on Friday, the fourth rate rise since May this year, with experts predicting additional monetary easing in the coming months.
The central bank likewise reduced its growth prediction for the current fiscal year to 7% from 7.25% in August due to worries about the ‘bleak’ global economy’s outlook. Still, it maintained the retail inflation estimate at 6.7%. In response to the RBI announcement, the standard government bond yield finished at 7.39 %, up from 7.34 % on Thursday. The RBI raised the repo rates (at which the RBI loans money to banks to cover their short-term funding requirements) by 40 basis points in May. With Friday’s move, the RBI’s Monetary Policy Committee increased interest rates by 190 basis points in the five months since May. One-tenth of a %age point is equal to one basis point.
Table of Contents
Key Takeaways
- The repo rate is the interest rate at which financial institutions borrow money from the Reserve Bank of India
- The RBI raised the repo rate by 50 basis points to 5.9 % on Friday.
- This is the RBI’s fourth repo rate increase this fiscal year.
- Earlier this month, the central bank raised the repo rate to 5.4%.
- The central bank of India is anticipated to raise its policy interest rate by half a % for the third time in a row as even the rupee’s drop to a historic low this month complicated the fight against inflation
RBI Policy
In keeping with the aggressive monetary policies of other federal reserves and the turbulent markets across countries, the (RBI) Reserve Bank of India increased the repo rate by 50 % to 5.90% on Friday to contain the growing inflation.
The RBI Governor announced the rate increase on Friday. Five of the MPC’s members decided to raise the repo rate, the primary lending rate, by 50 basis points during the meeting that began on Wednesday.
A 50 basis point increase was also made to the rates for the (SDF) standing deposit facility and the standing margin facility (MGF), bringing them to 5.65 % and 6.15 %, respectively. The RBI’s maximum tolerance ceiling of 6% has been consistently exceeded by domestic retail inflation this year, prompting the central bank to increase the primary policy rate by 140 basis points since May to 5.4 %. The MPC must set the interest rate benchmark in India. Three committee members are within RBI, and the remaining three come from outside.
Reserve Bank of India
The RBI was founded in 1935 as a private organisation before becoming India’s central bank in 1949. The Reserve Bank serves as a “lender of last resort” and a banker to banks. It can help a bank that is solvent but is experiencing short-term liquidity issues by providing it with much-needed cash when nobody else would give that bank credit. To fight inflation, the (RBI) Reserve Bank of India raised its repo rate again. The central bank increased its repo rate by fifty points on 30 September 2022 in its most recent statement on monetary policy.
Repo Rate
The repo rate is the interest rate at which financial institutions borrow money from the Reserve Bank of India (RBI). In the event of inflation, the RBI raises the repo rate, while in the event of deflation, it lowers it. The RBI increases the repo rate to eliminate extra liquidity from the market. The reverse repo rate is the interest rate at which financial institutions maintain their deposits with the central bank. The repo rate is the overnight borrowing rate at which financial institutions borrow money from the central bank, the Reserve Bank of India (RBI). The RBI also uses the repo rate to control inflation. When commercial banks run out of cash, they borrow from the RBI for one day by selling RBI-approved assets such as treasury bills.
To repay, banks repurchase the securities at a predetermined price, called the repurchase option or repo. The interest rate levied by the RBI is the repo rate, the %age between the selling cost and the repo price. If the RBI raises the repo rate, banks will find it more challenging to acquire from it, decreasing cash flows in the economy and halting inflation. Lowering the repo rate boosts cash flows in the economy as lending becomes more affordable, stimulating economic expenditure.
Increasing Repo rate affects mortgage EMIs
The repo rate’s increase to 5.90% suggests that new house loans will become more expensive as interest rates rise. Existing mortgages might also fall, but only if the interest rates are floating. Housing loans with fixed interest rates will not impact the raised repo rate.
According to Sterling Developers Ltd In, Chairman, and CEO Ramani Sastri, “We have noticed a healthy rebound in home purchases and debuts in the recent couple of quarters.” This increase in the interest rates presents a challenge for the real estate market since it will result in higher home loan rates, dampening prospective buyers’ moods.
As a result, as the market is still recuperating from the epidemic, the decision will also negatively affect the business’s mood. However, a fundamental shift in consumer attitudes and expectations toward homeownership may help to sustain the current housing market trend.
