RBI hikes REPO RATE

BE/RBI NOTE/29/2018

What Experts guessed has come true. RBI has raised the REPO rate by 25 Basis Points to 6.50 per cent and the Reverse REPO rate also stands revised to 6.25 per cent which was hitherto 6.25 per cent.

Hike

  • This is the first time in nearly five years that the RBI has gone for a back-to-back hike.  That is to say, the REPO rate had been increased by 25 BPS to  25 per cent in its last policy meet in June.  Similar consecutive rate hike was made in October 2013.
  • Reverse REPO rate was also hiked to by 25 basis points to 6.25 per cent.

Effect of Rate hike:

  1. Normally, commercial banks follow the suit and take cognizance of RBI’s monetary policy stand in increasing or decreasing the lending rates.
  2. For Example, every time when RBI lowers REPO rate, banks are typically expected to pass on the benefit to retail customers which normally is followed by State Bank of India (SBI)—the country’s largest lender.
  3. The next question is whether EMIs (Equated Monthly Instalments) on Home, Auto, Personal and other loans are set to go up, due to the hike in the Central Bank’s policy rates? Banks are yet to react on the two back-to-back hikes by the RBI it is felt that Banks may react by increasing  had not passed on the lending rates this time, since the rate hike was not passed on to the customers last time.
  4. Another important point to note iss that Banks had just days ahead of the last RBI’s monetary policy review in June, increased benchmark lending rates or MCLR (Marginal Cost of funds based Lending rate) by up to 0.1 per cent, making loans costlier for consumers.

Comments:

  1. Probably the banks’ lending rate will mostly depend on the changing liquidity position. Precisely if liquidity is tight, banks may undertake a rate hike.
  2. Banks will also take into account the cost of funds.
  3. Another important factor to take note of is that on several occasions the hikes have happened independent of RBI policy decisions.
  4. The rate hike is attributed to the raising inflation factor, especially the increase in cost of fuel. RBI has set a target to keep inflation at 4 per cent (+/-2 per cent).

Note:

REPO Rate It is the rate at which the central bank lends short term money to commercial banks.
Reverse REPO Rate  It is the rate at which RBI borrows money from commercial banks.

Author: Admin Bankedge

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