Home loans will be more expensive: In a move that will raise EMIs for home loans and all types of retail and institutional loans, the Reserve Bank of India on Wednesday raised the benchmark lending rate by 40 basis points to 4.40% and the reserve of cash from 50 basis points to 4.5% . The decision was announced after an unscheduled meeting of the Monetary Policy Committee (MPC) chaired by RBI Governor Shaktikanta Das.
Das said the six MPC members voted unanimously for a rate hike to contain inflation which has remained stubbornly above the 6% target for the past three months. He said the increase in the cash reserve will suck Rs 87,000 crore of liquidity from the banking system. The increase in the CRR will be effective from 21 May.
The repo rate is the rate at which the central bank lends money to commercial banks while the CRR is a certain minimum amount that banks must deposit as reserves with the central bank.
Das said the MPC’s decision reversed the May 2020 interest rate cut by an equal amount. The central bank had last revised its key repo rate or short-term lending rate on May 22, 2020, in an off-policy cycle to stimulate demand by bringing the interest rate down to an all-time low of 4%.
RBI cites inflation concerns
According to Das, this geopolitical tension is pushing inflation, adding that “the global economic recovery is losing momentum.” “Shortages, commodity and financial market volatility are becoming more acute,” he said.
This is the first rate hike since August 2018 and the first instance of the MPC making an unanticipated increase in the repo rate. The next meeting of the MPC is scheduled for June 6-8.
“Several central banks have already started to tighten policy to curb inflation. Today’s rate hike is aimed at containing inflation and re-anchoring inflation expectations,” said Ravi Singh, vice chairman and Head of Research at ShareIndia.
“It is not very surprising that the RBI has increased the repo rate. Inflation has reached 6.95% and it is likely that the government will curb liquidity. The bright side is that the Indian economy is on a solid foundation and most agencies have predicted a promising growth rate in the range of 8-9% for the current fiscal year,” said Subhash Goel, MD- Goel Ganga Developments.
Notably, the State Bank of India and HDFC have already raised their interest rate slightly. While the SBI last month raised the marginal cost of lending rate (MCLR) on all types of retail and institutional loans by 10 basis points, the private lender raised the prime retail lending rate (RPLR). ) on home loans by 5 basis points. A basis point is equal to one hundredth of a percentage point.
READ MORE: RBI hikes interest rate by 40bps to 4.40%, CRR to 4.50% in unscheduled policy review
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