Loans to get costlier as RBI hikes repo rate again

Monetary Policy Committee

Monetary Policy Committee

The cost of borrowing for Indians increased on Wednesday after the Reserve Bank of India (RBI) hiked benchmark interest rates by 25 basis points to 6.5 per cent (detailed report).

Standard Chartered Bank chief executive officer (India) Zarin Daruwala said, "The 25 basis points hike reaffirms RBI's commitment to bringing CPI inflation to 4 per cent on a durable basis". In its last revision, on August 2, 2017, rates were cut by 25 basis points to 6 per cent.

This is the first time since October 2013, where RBI has gone for a back-to-back rate hike.

Given the increase in crude prices and higher inflation expectations, Valecha sees one or two more rate hikes by the RBI this year.

The move will make the home loans dearer and will have direct impact on the borrowers as the rate hike will lead to banks raising their interest rates in loans.

Lenders believe that the neutral stance adopted by the RBI shows it's willingness to be accommodative with uncertainty over global growth.

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The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country. The projected inflation rate is above its targeted comfort level of 4 per cent.

RBI in its policy statement has said that the risks to its 4 per cent inflation outlook has increased since its last meeting in June on account of rising trade tensions.

The repo rate is the rate at which the RBI lends short-term money to the banks. It pegged retail inflation at 4.8 per cent for the second half of the current fiscal.

Among the Monetary Policy Committee panel members, Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R Patel voted in favour of the decision while Dr. Ravindra H Dholakia voted against the decision. At such a time, the hike in minimum support prices (MSPs) for kharif crops will only worsen this upward pressure on rural inflation.

The RBI policy retained the GDP growth projection for 2018-19, as in the June statement, at 7.4 per cent, ranging between 7.5-7.6 per cent in the first half of the fiscal and 7.3-7.4 per cent in the second half of the fiscal.

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