The Reserve Bank of India [RBI] today hiked the policy repo rate by 50 basis points, from 4.40% to 4.90%. This is the second hike in the policy repo rate in just more than a month, with the previous hike of 40 basis points coming in an unscheduled move in May.
With this hike, the repo rate is now up 90 basis points from the 4% mark that it was 36 days ago. RBI also hiked the cash reserve ratio (CRR) in the previous announcement.
The repo rate is the rate at which banks borrow from the RBI on a short-term basis.
The move is further expected to make home loans more expensive, as the cost of borrowing for banks are eventually passed on to the borrowers.
After May's surprise rate hike of 40 basis points, banks such as the Bank of Baroda lost no time in passing it on the consumers, hiking their repo linked interest rates the next day itself.
On the flipside however, this also means that medium to long term savings products too, specially fixed deposits, will have a slight increase in their interest rates, with several banks gradually hiking their fixed deposit rates.
Central banks in economies around the world are hiking their policy interest rates around the world for two primary reasons. First, it is to withdraw the extraordinary easy money policies they had during the COVID-19 pandemic and second, to combat inflation that has spread across the world as a result of supply shock bottlenecks caused due to the Russian-Ukranian conflict.
Interest rates aim to counteract inflation as a quantitative tool by subduing demand, trying to make lesser money chase the same amount of goods. Raising policy rates makes it more expensive to borrow and incentivises savings.
Inflation took centre stage in RBI Governor Shaktikanta Das' address following the bi-monthly Monetary Policy Committee (MPC) meeting. "A large part of the rise in inflation is primarily attributed to a series of supply shocks linked to the war", he said.
In India, inflation has been above the tolerance band of 6% for four consecutive months, with April's number showing inflation at 7.79%, an eight-year high.
Further hikes should also be expected in the future. "The MPC also decided unanimously to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth", he said.
Consumer announcements
There were two announcements concerning consumers.
The first announcement is on mandate on cards, which is needed for recurring payments. While the current limit is current ₹5,000 above which consumer consent is required for every recurring payment, it is now proposed to increase it to ₹15,000.
In the next announcement, the RBI has proposed linking credit cards to the Unified Payments Interface network starting with RuPay credit cards. Currently, accounts can be linked with UPI only through debit cards.
Other announcements
The policy hike will also alter the mechanics of how the RBI lends.
The LAF is the tool which guides the short-term monetary stability operation of the RBI. The lower band or the floor of the corridor, provided by the Standing Deposit Facility (SDF), which is 25 basis points below the repo rate, now stands at 4.75%. The SDF is the rate at which the RBI can borrow from banks overnight without providing securities.
The upper end of the corridor is the Marginal Standing Facility is now at 5.15% and is the rate at which the RBI lends to banks overnight. The policy repo rate at 4.9% is at its centre. Therefore, the lower end of the LAF corridor is absorptive as the RBI is borrowing funds from the banking system, while the upper end is injective, as the RBI is lending to the financial system.
The RBI also kept growth estimates for the current financial year unchanged at 7.2%, while inflation estimates are now at 6.7% for the full year.
Also Read: India's GDP Grows 8.7% In FY22, Q4 Growth Slows To 4.1%
On a regulatory note, the RBI has revised how much urban and rural cooperative banks can led towards home loans by 100%. It has let rural cooperative banks extend finance to residential housing projects and permitted urban cooperative banks to extend home loan services.
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