Post the August meeting held by the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI), the repo rate was increased by 25 basis points from 6.25 per cent to 6.50 per cent. This is the first time in nearly 5 years the repo rate was increased in two consecutive MPC meetings.
One hundredth of a percentage point is 1 basis point.
In the June meeting, the RBI had increased the repo rate from 6 per cent to 6.25 per cent. The last time the RBI had made back-to-back repo rate hikes was in October 2013.
The repo rate is basically the rate at which banks can borrow from RBI, the central bank, when it is short of funds. The reverse repo rate refers to the rate at which RBI borrows from banks. The reverse repo rate, too, was hiked by 25 basis points i.e. from 6 per cent to 6.25 per cent.
The repo rate was increased fearing further inflation in the near future. The retail inflation was expected to be around 4 per cent but has been exceeding the limit for several months. Coupled with inflation are the volatile crude oil prices and weakened rupee. However, RBI has promised to maintain a neutral stance so as to not curb overall economic growth.
The rise in repo rate was voted for by 5 out of the 6 members on the MPC. Ravindra Dholakia voted against the hike.
With the rise in the repo rate, the banks may choose to pass on the hike to customers. Hence, auto loan, home loan, and other loan rates may turn out to be higher if banks decide to hike the lending rate.
Source: Times of India