RBI hikes repo rate by 25 bps to 6.5%

In its December monetary policy review, the central bank had raised the benchmark interest rate by 35 bps after delivering three back-to-back 50 bps hikes.

New Delhi, Feb 08: The Reserve Bank of India on Wednesday hiked the repo rate by 25 basis points to 6.5%. These rates are decided by the six-member monetary policy committee (MPC), which is headed by RBI Governor Shaktikanta Das.

"Unprecedented events of the last three years have put to test monetary policy across the world. Emerging market economies are facing sharp tradeoffs between supporting economic activity and controlling inflation while preserving policy credibility," said RBI Governor Shaktikanta Das.

"The global economic outlook doesn't look as grim now as it did a few months ago, growth prospects in major economies have improved while inflation is on a descent though inflation still remains well-above the target in major economies," he said.

In its December monetary policy review, the central bank had raised the benchmark interest rate by 35 bps after delivering three back-to-back 50 bps hikes.

"Inflation is likely to moderate in 2023-24. On the assumption of a normal monsoon, CPI inflation is projected at 5.3% for 2023-24," Das said.

The central bank has pegged GDP growth at 6.4 per cent for 2023-24.

"The Real GDP growth for 2023-24 is projected at 6.4% with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6% & Q4 at 5.8%," the RBI Governor said.

What is repo rate?

Repo rate is the rate at which Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds. It is a key monetary policy used by the central bank to control inflation and the money supply in an economy.

What happens when RBI hikes repo rate

If Repo Rate is hiked, then it makes borrowing from the central bank more expensive for commercial banks, which can slow down the flow of credit and curb inflation.If Repo Rate comes down, then it would cost banks less to borrow from the RBI. This in turn allows the banks to lend in the marker at lower price without having to compromise with its own profit margin.