India's Central Bank Hikes Rates For the Second Time in 2018

The rate hike is expected to have a direct impact on exporters who have been reeling under the pressure of high raw material cost

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By Sanchita Dash

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The Reserve Bank of India is back at it again. In a second back-to-back hike (an incident that occurred last in 2013), the RBI has raised the repo rate by 25 basis points to 6.5 per cent. In the third bi-monthly policy, the RBI has also hiked the reverse repo rate to 6.25 per cent.

Repo rate is the discount rate at which banks borrow from RBI. Reduction in repo rate will help banks to get money at a cheaper rate, while increase in repo rate will make bank borrowings from RBI more expensive. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks.

The official statement from the RBI said that the decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

Impact on Businesses

The rate hike is expected to have a direct impact on exporters who have been reeling under the pressure of high raw material cost.

The RBI expects some moderation in the pace of exports due to trade tensions, but still projected country's growth at 7.4 per cent for 2018-19.

The RBI Governor didn't sound very hopeful for businesses to grow in India as he hinted towards the beginning of a currency war. A currency war will be most detrimental for India considering global growth has become uneven and risks to the outlook have increased with rising trade tensions. Will trade tensions engulf the growth of India, which is standing at the cusp of foreign direct investments being lured into the country and a vast opportunity to invest in is something time will tell.

The monetary policy statement however said increased FDI flows in recent months and continued buoyant domestic capital market conditions were good for investments.

Inflation and GDP Prediction

With the third bimonthly policy meet, the RBI has also projected that inflation would stand at 4.6 per cent in the second quarter while it would increase to 4.8 per cent in the second half of the fiscal year.

The GDP growth, in the other hand, has been predicted to be at 7.4 per cent for 2018-19. The growth in GDP in the first quarter of FY20 is projected at 7.5%.

What Does it Mean For You?

The hike in RBI's repo rate will have a direct impact on all. With the banks under pressure, the problem is often seen at the consumer's end. The raised repo rate will mean that we are likely to witness increase in interest that one normally pays for loans. This also means that home, car and personal loans are going to get costlier for all.

Loans were already set to get costlier for some as recently, the State Bank of India, Punjab National Bank and ICICI bank had already increased the benchmark lending rates by 0.1 per cent.

Sanchita Dash

Entrepreneur Staff

Former Senior Correspondent, Entrepreneur India

In the business of news for 5 years now. Making my way across India thanks to my career. A media graduate from Symbiosis, Pune, I have earlier worked with Deccan Chronicle (South India's leading English daily), T-Hub (India's largest incubator) and Anthill Ventures (a speed-scaling platform). 

Stories, movies and PJs are my thing. 

If you hear 'The Office' opening score randomly, don't worry it's just my phone ringing. 

 

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