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Friday, March 31, 2023

RBI Increases Repo Rate by 50 Basis Points to 5.40 Percent

The central bank has raised rates three times this fiscal year

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Sadaf Hasan
Sadaf Hasan
Aspiring reporter covering trending topics

INDIA. New Delhi: The repo rate was increased by 50 basis points (bps) to 5.40 per cent with immediate effect by the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Friday.

The central bank has raised rates three times this fiscal year. The RBI had previously increased the repo rate twice, by 50 bps in June and by 40 bps in a meeting held outside of the regular cycle. Market analysts anticipated that the MPC would increase the repo rate in this meeting by at least 35 basis points (bps).

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Consumer Price Index (CPI), or retail inflation, which the RBI takes into account when determining its benchmark lending rate, was 7.01 per cent in June. Since January this year, retail inflation has been above the central bank’s 6% comfort level.

The MPC voted unanimously, according to Das, and the MPC has chosen to continue focusing on the withdrawal of the accommodative stance to control inflation. 

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Additionally, he stated that the bank rate, marginal standing facility, and standing deposit facility rates have all been modified to 5.65 per cent, 5.15 per cent, and 5.15 per cent, respectively.

Why did the RBI increase the repo rate?

Das stated today that India’s economy has been struggling with rising inflation and added that over the past three months, the country had experienced a $13.3 billion capital outflow.

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He pointed out that the financial sector is still well capitalised and that India’s foreign exchange reserves offer protection against global spillovers.

Speaking about growth, Das stated that the real GDP growth prediction for 2022–2023 is kept at 7.2%, with Q1 growth at 16.2%, Q2 growth at 6.2%, Q3 growth at 4.1%, and Q4 growth at 4.0%, with risks being largely balanced. He did, however, issue a warning that the current conflict between Russia and Ukraine poses hazards.

The governor of the RBI remarked that retail inflation is still uncomfortably high and that it is anticipated to remain above 6%. 

He said that, on the premise of a typical monsoon in 2022 and an average crude oil price (Indian basket) of US$ 105 per barrel, the inflation projection is kept at 6.7% in 2022–2023, with Q2 at 7.1%, Q3 at 6.4%, and Q4 at 5.8%. The expected CPI inflation rate for the first quarter of 2023–2024 is 5.0%.

Market professionals’ and economists responses

Adhil Shetty, CEO at BankBazaar.com, said, “New and existing borrowers will be affected hard by the increase in the repo rate combined with the inflation. Borrowers will now be paying 8.2–8.4 per cent interest instead of the 6.8–7% they were previously paying due to a 140 basis point rise over the past six months. As a result, even for a 20-year loan, the interest payment is greater than the principal.”

“The length of a 20-year loan might increase by as much as 8 years if the EMI stays the same. It is inevitable that EMIs would rise because the majority of lenders would not approve this extension of the tenor. A repayment strategy is necessary because simply paying the EMIs would result in a large interest expense”.

R.E Reddy, CEO and Managing Partner at CRCL LLP, said, “The repo rate was raised by the RBI today by an additional 50 basis points to 5.40 per cent with immediate effect. With this action, the easy money era will come to an end, and conditions will return to what they were before to COVID. There is not even the slightest chance that India will experience a recession.”

“By the end of FY23, this will raise the terminal rate to 5.90 per cent. It will be easier to control crude prices if there is a regular monsoon, a successful crop year, household inflation eases, and tension between Russia and Ukraine decreases,” he added.

Also Read: Loans Likely to Become Dearer Following Hike in Repo Rate by RBI


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