The repo rate was increased by 25 basis points to 6.5 percent on Wednesday from 6.25 percent by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which is led by Governor Shaktikanta Das. Repo Rate (RR) is the interest rate at which India’s central bank lends money to private or public commercial banks and other financial institutions in exchange for government assets. Four MPC members, as opposed to two, voted in favour of the repo rate revision, according to Das. The central bank stated that the withdrawal of accommodation remains the primary objective of its monetary stance.
“Repo rate now in positive territory. Further action is warranted in India,” noted RBI Governor Das.
The current policy rates:
> Standing Deposit Facility (SDF) rate: 6.25%
> Marginal Standing Facility (MCF) rate: 6.75%
In the RBI’s December monetary policy review, the central bank raised the key benchmark interest rate by 35 basis points. This is the sixth time the interest rate has been hiked since May 2022. The central bank has also hiked the short-term lending rate by 250 basis points to contain rising inflation. The policy rates before the February revision stood at:
Repo Rate: 6.25%
Standing Deposit Facility Rate: 6.00%
MSF Rate: 6.50%
Bank Rate: 6.50%
Reverse Repo Rate: 3.35%
CRR: 4.50%
SLR: 18.00%
Das stated that the policy rate, which is currently 6.5%, is still below the pre-pandemic level and that core inflation will continue to be sticky. Inflation in manufactured products is typically referred to as core inflation.
According to experts, the most recent increase in repo rates may be the last one in the RBI’s current cycle of tightening, after which there may be a halt.
Das pointed out that the picture for the world economy is not as bleak as it was a few months ago. Major economies continue to have high inflation rates. The environment is still unstable and unclear.
“The RBI as expected hiked repo rate by 25 bps. The split mandate of 4-2 was also as expected. The stance too was unchanged which is in line with the excess liquidity continuing to be tightened. We see the RBI remaining concerned about inflation, especially core inflation. We expect inflation to average around 5.2% in FY2024 with adverse risks to growth likely to increase. The RBI will likely become increasingly data dependent and look at the impact of the past rate hikes on inflation-growth dynamics. We expect the RBI to pause from the next policy onwards with a likely shift in stance to neutral as the liquidity tightens further over March-April,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.
“The 25bps hike in REPO rate announced by the RBI is a well-balanced approach between handling inflation and economic growth. This was expected by the industry as inflation rate has remained above the tolerance band, though it has softened in the last few months. This hike will further help moderate inflation in the economy. A 25bps hike in Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rate respectively to withdraw surplus liquidity would further support in stabilizing inflation in the economy. Since the beginning of the rate hike cycle, which began in May 2022, the RBI has hiked its repo rate by 250 bps. With an MCLR rate of 8.4%, about 60% of the repo rate hike, so far, has already transmitted into the lending rates. Thus, the borrowing costs have significantly increased across the product categories including the housing sector. Post today’s rate hike, borrowing costs could be expensive by another 10 – 15 bps, on an immediate basis,” said Shishir Baijal, Chairman & Managing Director, Knight Frank India