Mumbai: In a surprising move that will raise the borrowing costs for corporates and individuals, the RBI on Wednesday raised the interest rate by 50 basis points to a two-year high of 4.9 per cent as it doubled down to tame inflation that has surged in the last couple of months. All the six members of the Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted for the latest rate hike.
Consumer Price Index (CPI) based inflation, which RBI factors in while arriving at its monetary policy, galloped for the seventh straight month to touch an 8-year high of 7.79 per cent in April.
The rate hike comes on the back of a 40 bps increase effected by RBI at an unscheduled meeting on May 4. During that May meeting headed by RBI Governor Shaktikanta Das, the Monetary Policy Committee (MPC) also raised the amount of deposits banks are required to maintain a cash reserve by 50 bps to 4.5 per cent to suck out Rs 87,000 crore of liquidity from the banking system. The RBI said the CRR hike will be effective from May 21.
Notably, the hike in May was the first-rate hike since August 2018 and the first instance of the MPC making an unscheduled increase in the repo rate (the rate at which banks borrow from the RBI).
As the inflation remained above the targetted 6 per cent since January, the RBI governor said the inflation print in April is also likely to be high. The retail inflation print for March stood at 6.9 per cent.
Moreover, the RBI governor added that the MPC decision reversed the May 2020 interest rate cut by an equal amount.
The surprising move from RBI to increase the repo rate will make all the banks increase interest rates on loans. Hence, the home loans, and auto loans will become costlier in the days to come. If some of you are planning to go for a loan, then you better do it soon, as the interest rate on loans could start increasing soon.
Moreover, the repo rate increase means it is a bad news for existing borrowers also as banks and other financial institutions will soon start increasing interest rates on loans, which in turn means that the loan EMIs will also go up. All loans will be impacted by the latest policy decision of the RBI — be it a home loan, car loan or personal loan.
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