RBI raises repo rate by 50 bps to 5.4%, third increase in a row

New Delhi, Aug 05: The Reserve Bank of India on Friday hiked key lending rate by 50 basis points to pre-pandemic level of 5.4%, third increase in a row. Repo rate is now back to pre-pandemic levels, highest since August 2019.

The move will now makes loans, including home loans costlier for borrowers. The good news is that fixed deposit interest rates are also likely to move higher, given the RBI's stance. Fixed deposits, particularly from banks have been extremely low and banks may now be forced to hike interest rates on deposit, if credit begins to surge.

"The real GDP growth projection for 2022-23 is retained at 7.2% with Q1- 16.2%, Q2- 6.2%, Q3 -4.1% and Q4- 4% with risks broadly balanced. The real GDP growth for Q1 2023-24 is projected at 6.7%," said RBI Governor Shaktikanta Das.

The central bank has already announced to gradually withdraw its accommodative monetary policy stance.

Both the central bank and the government have been taking steps to contain inflation which is ruling above the RBI's comfort level of 6 per cent since January this year and stood at 7.01 per cent in June.

Inflation based on the wholesale price index (WPI) remained in double-digit for 15 months in a row. The WPI reading was 15.18 per cent in June.

Finance Minister Nirmala Sitharaman in Rajya Sabha on Tuesday said: "We have made sure that the Reserve Bank of India and the Government, put together, are taking enough steps to make sure that it is kept in the band of 7 or ideally below 6".

The RBI raised the short-term borrowing rate (repo) twice so far this fiscal - by 40 basis points (bps) in May and 50 bps in June to tame retail inflation.

The existing repo rate of 4.9 per cent is still below the pre-Covid level of 5.15 per cent. The central bank sharply reduced the repo rate in 2020 to tide over the crisis induced by the pandemic.

Experts are of the view that the RBI would raise the benchmark rate to at least the pre-pandemic level this week and even further in later months.

Punjab & Sind Bank managing director Swarup Kumar Saha said he expects RBI to hike the repo rate between 35 bps and 50 bps this week in view of the prevailing economic situation.

Umesh Revankar, MD & CEO, Shriram Transport Finance Company said the MPC is expected to unanimously vote for an upward of 35 bps hike in policy rates in August 2022 as the domestic macro-economy has not changed much since the previous policy.

The government has tasked the RBI to ensure consumer price index-based inflation remains at 4 per cent with a margin of 2 per cent on either side.

The RBI mainly factors in retail inflation based on Consumer Price Index (CPI) while arriving at its monetary policy.