In a recent development, the Reserve Bank of India (RBI) has hiked the repo rate by 25 basis points (bps) to 6.50 percent. The decision took place in a meeting of RBI’s monetary policy committee (MPC) headed by Governor Urjit Patel and six other members. However, the reverse repo rate was also raised by a similar proportion to 6.25 percent.
This is the first time since October 2013, where RBI has gone for a back-to-back rate hike. The earlier hike was done in its last policy meet which took place in June where the repo rate was increased by 25 bps to 6.25 percent.
The RBI has maintained a ‘neutral’ stance in the policy as it aimed to contain inflation. According to them, rising trade tensions and retail inflation were the major reasons behind the hike in repo rate.
For the current fiscal year, RBI has kept the GDP forecast unchanged at 7.4 percent, while for the second half of the current fiscal; it may have a minor increase to 7.5-7.6 percent.
While, it is a usual activity that whenever RBI hikes repo rate, banks decide to pass on the hike to loan borrowers which mean that home, auto, and other loans are set to get costlier. However, it’s not announced yet.
According to an official from a leading Government bank, “The rate hike was on expected lines. What we will do is to evaluate further. At the moment we don’t immediately need to react. We will have to see how it goes over the next couple of weeks.”
The repo rate is the rate at which the RBI lends short-term money to the banks. On the other hand, Reverse repo rate is the rate at which the RBI borrows money from commercial banks.