RBI Hikes Repo Rates By 50 Basis Points, Loans To Get Costlier

The Reserve Bank's rate-setting panel -- Monetary Policy Committee - which began its meeting on Aug 3 for three days raised the repo rates, or rates at which the RBI lends money to banks by 50 basis points. The repo rate following the hike now moves to 5.40%, as against the earlier repo rate of 4.90%.

With retail inflation ruling above 6 per cent for six months, the RBI had raised the short-term borrowing rate (repo) twice -- by 40 basis points in May and 50 basis points in June.
Ahead of the policy, most analysts had expected the RBI to raise raise rates by 25 to basis points, with the consensus was for more of a 50 basis points hike.

Rajani Sinha, Chief Economist, CareEdge, ahead of the MPC announcement said, "With the softening of many commodity prices, CPI inflation seems to have broadly peaked at the current levels and expected to witness a downward movement to below 6% by Q4FY23. However, domestic inflation is still high and so is the global commodity prices, we expect RBI to continue with front-loading of rate hiking cycle. We expect 50 bps of repo rate hike in the upcoming policy and another 50-bps rate hike post that taking the terminal repo rate to 5.90% by the end of the fiscal year."

The move will now makes loans, including home loans costlier for borrowers. The good news is that fixed deposit interest rates are also likely to move higher, given the RBI's stance. Fixed deposits, particularly from banks have been extremely low and banks may now be forced to hike interest rates on deposit, if credit begins to surge.

With forex inflows reducing and with credit offtake picking up, the liquidity in the system is likely to remain tight, which will keep the yield curve steep. This will also enable better transmission of the policy rate hikes by the Central Bank. CareEdge expects 10-year G-Sec yield to rise to 7.50-7.75% by the end of the fiscal year.