The RBI Monetary Policy Committee (MPC) on Wednesday increased the repo rate by 25 basis points, thereby pushing the new rate to become 6.25 %. This comes as a part of their Second Bi-Monthly Monetary Policy Statement for 2018-19.
This is the first hike in the last four years since NDA Government came to power in 2014. Business Today reported that even though all the six members of MPC voted in favour of the hike, the deliberation was longer than usual. This time they took three days to reach a conclusion instead of two.
With this move, the RBI has taken a back step on its rate-cutting policy that the apex bank had adopted since January 15, 2015.
Reportedly, the MPC voted in favour of the rate hike after taking into consideration the rise in inflation which might come as a result of a rise in international crude oil prices.
What Does The Hike Mean?
For the common man, this might come as unpleasant news as banks may consider increasing lending rates following the rise in repo rate. Nationalised banks like SBI, Punjab National Bank and Bank Of India had already increased their lending rates last week.
This means that borrowers might have to pay a higher rate of interest for their bank loans. For most parts, whenever, the RBI has altered repo rates, it is the consumers who had to bear the burden.
Why The Hike?
The reasons for the hike is primarily due to rising inflation which comes as a result of the unstable global crude oil prices and the dismal conditions of the Rupee-Dollar nexus.
Consumer price inflation or CPI was 4.6% in April 2018, which is higher than RBI’s 4% target since November 2017. However, the CPI is still well within the upper limit of 6%.
Not only this, but the central bank has once again changed its inflation forecast from 4.7-5.1% for the first half and 4.4% in the second half to 4.8-4.9% and 4.7%, respectively. The MPC report also said, “Crude oil prices have been volatile recently, and this imparts considerable uncertainty to the inflation outlook — both on the upside and the downside.”
What Is Repo Rate?
Repo rate is the rate at which banks borrow money from RBI by selling their surplus government securities. Also known as Repurchased Rates, these loans can be short or can be up to 2 weeks long.
For example, if the Repo Rate is 6% and if a bank takes a loan of Rs. 1000 from RBI, they will have to pay an interest of Rs. 60 to RBI.
This is also one of the tools that RBI uses to tackle probable inflation and put a check on the cash flow in the economy.