RBI Hikes Repo Rate By 50 Basis Points

The Monetary Policy Committee focuses on ensuring that inflation remains within the target range, while supporting growth

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The Monetary Policy Committee (MPC) of the Reserve Bank of India hiked the repo rate by 50 basis points to 4.90 per cent during its monetary policy meeting on Wednesday, following a 40-basis point increase on May 4. The hike comes in line as the inflation is likely to be above 6 per cent till December 2022. The MPC seems to have focused on ensuring that inflation remains within the target range, while supporting growth. The outcome of the repo rate hike will have a direct impact on loan borrowers who intend to take a car loan, gold loan, personal loan or a home loan in the near future as banks and NBFCs may raise lending rates.

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Suvodeep Rakshit, senior economist at Kotak Institutional Equities, was quoted in a news report as saying, "The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation. The RBI's decision of hiking the repo rate by 50 bps as well as increasing the inflation estimated by 100 bps was in line with the market expectations. We expect 35 bps repo rate hike in the August policy to 5.25 per cent and to 5.75 per cent by the end of FY23."

The marginal standing facility rate and the bank rate have been increased from 4.65 per cent to 5.15 per cent, but MPC has kept the cash reserve ratio unchanged at 4.5 per cent. The central bank raised its FY23 inflation forecast from 5.7 per cent to 6.7 per cent. RBI has retained the real GDP growth projection for FY23 at 7.2 per cent.

"The MPC increased its CPI estimates to 6.7 per cent from 5.7 per cent for FY23, which now appears to be a more realistic level. This contributes to enhance the credibility and confidence in the RBI's policy decisions. The status of CRR certainly comes as a positive surprise for the banking sector and augurs well to nurture credit growth revival," said Yesha Shah, head of equity research at Samco Securities, in a news report.

On Wednesday, RBI decided to permit urban cooperative banks to extend doorstep banking service to their customers. To improve recurring payments like subscriptions and education fee under the e-mandate framework, RBI decided to enhance its limit from INR 5,000 to INR 15,000 per transaction. It also allowed linking of credit cards on the UPI platform and make modification to the payments infrastructure development fund.