RBI hikes Repo rate by 25 bps to 6.5%

The Reserve Bank of India’s Monetary Policy Committee (MPC) has increased the repo rate by 25 basis points to 6.5%. However it has left the door open to more increases in future, saying core inflation remained high.

After this interest rates have gone up by 250 basis points in the current cycle, which was kicked off by a 40 bps rate hike in an off-cycle meeting in May last year. As a result, the standing deposit facility (SDF) rate will be 6.25% and the marginal standing facility (MSF) rate and the bank rate have been raised to 6.75%.

“The rate hikes since May 2022 are still working their way through the system. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospect,” said Das. He said the inflation-adjusted, real interest rate remains below pre-pandemic levels and liquidity remains surplus, even though it is lower than during the pandemic.

The RBI has brought down the liquidity surplus in the banking system to below Rs 2 trillion from around Rs 9-10 trillion in the aftermath of pandemic-related support measures. While consumer price inflation has been pegged at 5.3% for FY24, the GDP growth rate for FY24 has been projected at 6.4%, with Q1 FY24 growth rate at a whopping 7.8%.

With the announcement now lending rates of banks are expected to go up as the cost of funds is expected to rise further. EMIs on vehicles, home and personal loans will also rise. The external benchmark linked lending rate (EBLR) of banks will rise by 25 bps — one basis point is one-hundredth of a percentage point— as such loans are linked to the Repo rate. As much as 43.6 per cent of the total loans are now linked to the Repo rate.

Marginal cost of funds-based lending rates (MCLR), which accounts for 49.2 per cent of the loans portfolio of banks, are also expected to move up. The hike will help in moderating inflation in the country.

To cash in on the popularity of Unified Payments Systems in India (UPI), the central has proposed permitting all inbound travellers to India to use UPI for their merchant payments while they are in the country. To begin with, this facility will be extended to travellers from G-20 countries arriving at select international airports.

The RBI is also launching a pilot project on QR Code-based coin vending machines in 12 cities. These vending machines will dispense coins against debit to the customer’s account using UPI instead of physical tendering of banknotes. This will enhance the ease of accessibility to coins.