by Elton Gomes
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) increased the repo rate by 25 basis points to 6.5 percent from the previous rate of 6.25 percent. The announcement was made during the MPC’s by-monthly meeting on Wednesday. This hike in repo rates is the second time in four years that the RBI has raised the repo rates. The MPC maintained the neutral stance to achieve the medium-term target for inflation of four percent.
The MPC, in its meet, took note of the uncertainty around domestic inflation and maintained that it needs to be carefully monitored in the coming months. In a statement, the committee said, “Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth,” as reported by Business Today.
The MPC added that the repo rate was hiked to maintain the four percent inflation target: “The main reason for increasing of the repo rate has been done to maintain the 4 per cent inflation target, a target from which we have been away for several months,” RBI Governor Urjit Patel said, as per Business Today.
This is the first time since October 2013 that the RBI has hiked the repo rate, after increasing it to 6.25 percent the previous time. The reverse repo rate has also been hiked from 6 percent to 6.25 percent.
The MPC meet
Headed by RBI governor Urjit Patel, the six-member panel began discussions on Monday to decide on key rates in the backdrop of elevated oil prices and inflation hovering around 5 percent. Experts were divided in their opinion about the likely outcome of the meeting. Some experts did not rule out a rate hike, while others were of the opinion that the apex bank will maintain status quo.
Analysts further claimed that the government’s decision to significantly increase the minimum support price for the Kharif crop could have an impact on inflation. Although prices of crude oil have come down after a three-year high, the continue to threaten inflation and current account deficit.
Loans to cost more
Borrowers can expect a further rise in loan costs after the rate hike. Adhil Shetty, CEO of BankBazaar.com, said, “”Loans will get marginally costlier. On a loan of Rs. 1 lakh for 20 years at an interest rate of 8.5 per cent, the EMI is Rs. 868. If the rate rises to 8.75 per cent, the EMI increases to 884. If the interest rate reaches 9 per cent, the EMI becomes Rs. 900. In a rising rate scenario, it makes immense sense for customers repaying loans to make periodic principal pre-payments,” NDTV reported.
Elton Gomes is a staff writer at Qrius.