RBI Increased Repo Rate by 40 bps to 4.40%. Know the Key Points Announced

RBI Governor Shaktikanta Das on May 4th 2022 announced a hike in Repo Rate by 40 basis points to 4.40% as inflation worries hit. The cash reserve ratio was also hiked by the Central Bank by 50 basis points.

What is Repo Rate?

The Repo Rate implies the rate at which banks borrow money from the Reserve Bank of India (RBI). The Repo Rate is RBI’s key tool to control inflation.

When the Repo Rate is increased, banks and NBFCs usually tend to offer loans to customers at a higher interest rate. Similarly, if the Repo Rate is decreased, the interest rates of home loans, car loans, and other EMIs will come down.

Now that RBI has increased the Repo Rate, banks and NBFCs will begin increasing the interest rates of home loans, car loans, personal loans, and other loans. An increase in the interest rates will impact the existing and new loan borrowers because the number of EMIs to be paid will go up.

Adhil Shetty, CEO, BankBazaar explained it with an example:

“On a home loan of Rs 50 lakh for 20 years at 7%, the EMI is Rs. 38,765, and the interest is Rs. 43.03 lakh. If the rate increases to 7.4%, the EMI becomes Rs. 39,974, and the interest Rs. 45.93 lakh. Your EMI is set, and it may not increase, but the number of EMIs you pay may increase. To tackle this hike, you could refinance to a lower rate, increase your EMIs, and make pre-payments regularly.”

Let’s discuss the key pointers addressed by the RBI Governor (Shaktikanta Das)

  1. Shaktikanta Das said the decision to increase the Repo Rate was taken due to rising inflation, increasing crude oil prices and geopolitical tensions and deficiency of commodities globally, which impacted India’s economy.
  2. RBI warned there could be global spillover risks because of the increased commodity prices, and geopolitical tensions.
  3. This is the first hike since August 2018 and could increase the borrowing cost for individuals along with corporates.
  4. RBI decided to stay accommodative while focusing on the withdrawal of accommodation to make sure inflation will be within the limits moving forward.
  5. The governor said food inflation may remain high as domestic wheat prices are getting impacted due to the global shortage of wheat.
  6. Edible oil prices may firm up because of the export restrictions by major producing countries.
  7. Retail inflation is nearly 7 per cent in March 2022. For the third consecutive month, inflation held the upper end of the RBI target band of 2-4 per cent.
  8. Even the U.S. Federal Reserve increased the benchmark lending rate by half a percentage point to limit inflation. In March 2022, the benchmark lending rate was increased by a quarter-point, and now the rate is raised above 0.75 per cent by the US central bank.

Top Quotes from the Governor

  • “The monetary policy committee judged that the inflation outlook warrants an appropriate and timely response through resolute and calibrated steps to ensure that second-round effects of supply-side shocks on the economy are contained, and long-term inflation expectations are kept firmly anchored.”
  • “I would like to emphasise that the monetary policy action is aimed at containing inflation spike and re-anchoring inflation expectation.”
  • “High inflation is known as detrimental to growth.”
  • “Persistent and spreading inflationary pressures are becoming more acute with every passing day.”

What Analysts are Predicting?

Analysts are expecting there could be more rate hikes by the Reserve Bank of India going forward. Abheek Barua, Chief Economist, HDFC Bank said, “The sharper than expected rate increase by the RBI today paves the way for a more aggressive rate hike cycle than we earlier expected.”

A few banks along with SBI recently hiked the Marginal Cost of Funds-based Lending Rate (MCLR) points expecting a rate hike.

The Only Relief!

For those who park their money in their savings bank accounts, the interest rates on deposits are expected to go up. Likewise, banks will likely increase the interest rates for both short-term and long-term fixed deposits.