Second Consecutive Repo Rate Hike by RBI
As expected by the market, RBI’s (Reserve Bank of India) monetary policy committee increased the repo rate by 25 basis points on Wednesday, 1 August 2018. The repo rate has now risen to 6.50%.
Repo rate stands for repurchase rate, and it refers to the rate at which commercial banks in India borrow money from RBI when they experience a shortfall in their funds.
The latest increase by the RBI is the second consecutive one. In June, the RBI increased the repo rate by 25 basis points, causing the rate to increase to 6.25%. That was the first increase in repo rate after Prime Minister Narendra Modi came into power in May 2014.
The repo rate has been increased back-to-back for the first time since October 2013. However, the monetary policy committee is still maintaining a neutral stance.
On the other hand, the reverse repo rate, which refers to the rate at which RBI borrows money from commercial banks, is now 6.25%.
The increase of repo rate will have a significant impact on loans. Banks are likely to hike interest rates on loan, increasing the EMIs (Equated Monthly Instalments). That is because the Marginal Cost Based Lending Rate (MCLR) of the banks will go up.
After the announced update, some banks have already increased their MCLR by 5-10bps including Union Bank of India, Kotak Mahindra Bank, and Karnataka Bank. This will impact Home Loan borrowers. The Home Loan Interest Rates have been hiked by 0.25%, making the EMIs costlier. Same goes for all floating interest rate loans.
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RBI Governor Urjit Patel, Chetan Ghate, Viral Acharya, Michael Debabrata Patra, and Pami Dua voted in favour of increasing the repo rate while Ravindra Dholakia voted against it. The minutes of monetary policy committee meeting will be published on 16 August 2018 while the next meeting of the committee is slated from 3 to 5 October 2018.
A statement issued by the RBI said that inflation estimates for the second quarter have been amended to reflect the downward trend, albeit marginally. However, the projections for the third quarter of 2018 remain unchanged.
The current trade tensions could have a negative effect on exports, but the GDP growth estimates for 2018 – 19 remain the same as what was mentioned in the June statement which is 7.4%. The growth projections will range from 7.5 to 7.6%in H1 and 7.3 to 7.4% in H2 while the GDP growth in the first quarter of 2019 – 20 is estimated at 7.5%, the RBI’s statement added.
With inflation rising, it was anticipated that the RBI would tighten the nation’s monetary policy. Consumer prices have increased from 4.87% in May to 5% in June. As a result, retail inflation has been increasing for three consecutive months.
Before the rate increase was announced, the 10-year benchmark bond yield increase for a short while from 7.78% to 7.84% before going back to the original level. Even the rupee enjoyed a brief high, trading at 68.50 to a dollar from a previous 68.54 prior to the announcement.
Headline inflation is still more than the target 4% while core inflation sans food and fuel is also high. Coupled with the hike in raw materials the last couple of quarters, Kotak Institutional Equities anticipated a hike in the repo rate.
The brokerage house stated increase in the minimal support price of Kharif crop along with food inflation and falling rupee, there was certainty that the central bank would increase rates.
Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, said that growth was still strong and output gap was being bridged quickly. This can result in medium-term inflation.
Sumit Bilgaiyan, Co-Founder and Director, Equity 99, said that government spending was under scrutiny. Currently, the economy is improving, with auto sales increasing in the last quarter, thanks to a strong monsoon. This was an indication that rural area economy was recovering.
Mr. Bilgaiyan added that the RBI was not just keeping track of matters in the domestic front, but also internationally.
However, economists expressed concern as the trade war appears to be heating up.
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