RBI increases repo rate to 6.25 per cent fearing inflation

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Reserve Bank of India’s (RBI) key policy rate, the repo rate was boosted by 25 bps (1 basis point = 0.1 percentage point) to 6.25 per cent. The hike is a first during the NDA’s regime at the Centre.

Rupee
The repo rate was at 6 per cent in August 2009 and is now increased to 6.25 per cent.

RBI Governor Urjit Patel, who took charge in September 2016, announced the new rate on Wednesday following a 3-day meeting. The 6-member Monetary Policy Committee took the decision in unanimity.

The soaring crude oil prices, the inflating commodity prices, and developments of the global financial market are sources of uncertainty with regard to whether they will lead to an upside or downside of the complete inflation outlook. These were some of the factors that led to the change in repo rate.

While the repo rate i.e. the rate at which RBI lends to banks is 6.25 per cent, the reverse repo rate i.e. the rate the RBI pays for the deposits the banks make is 6 per cent. The penal rate, on the other hand, is 6.5 per cent.

The new repo rate will affect businesses as well as individuals. The lending rate on personal loans, auto loans, and housing loans are expected to go up.

The repo rate, since the year 2014, has seen a gradual drop. It was at 8 per cent in 2014 and dropped by 25 bps every few months and landed at 6 per cent in 2017.

Earlier this week, a few banks such as ICICI Bank, HDFC, Punjab National Bank, and State Bank of India raised their MCLR or the lending rate by around 10 bps, making loans from such banks costlier.

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