RBI goes for back-to-back repo rate hike first time since October 2013, EMIs may get costlier

NEW DELHI: The Reserve Bank of India (RBI) on Wednesday hiked repo rate following its August monetary policy meet. The central bank’s monetary policy committee (MPC), headed by governor Urjit Patel, raised the repo rate by 25 basis points (bps) to 6.50 per cent.
The RBI has maintained a ‘neutral’ stance in the policy.
This is the first time since October 2013, where RBI has gone for a back-to-back rate hike, having increased repo rate by 25 bps to 6.25 per cent in its last policy meet in June.
The repo rate is the rate at which the RBI lends short-term money to the banks.
Reverse repo rate — the rate at which the RBI borrows money from commercial banks — too has been hiked from 6 per cent to 6.25 per cent.
Usually when RBI hikes repo rate, banks typically pass on the burden to customers. It is almost always the SBI — the country’s largest lender — that leads the rate cut cycle with other banks following suit. If the banks do indeed decide to pass on the hike, then home, auto and other loans are set to get costlier.
For July-September, it pegged CPI-based retail inflation at 4.2 per cent which it saw firming up to 4.8 per cent in the second half of the current fiscal.
RBI kept the GDP forecast for the current fiscal unchanged at 7.4 per cent and saw it at 7.5-7.6 per cent in the second half of the current fiscal.
RBI Governor Urjit Patel said on the domestic front, monetary policy committee took note of rise in retail CPI inflation for 3rd consecutive month in June. Even as food inflation remained muted, other components recorded moderate to sharp price increases.
“The rate hike was on expected lines. What we will do is to evaluate further. At the moment we don’t immediately need to react. We will have to see how it goes over the next couple of weeks,” an SBI representative said.
A couple of days ahead of the RBI rate announcement, SBI had raised interest rates on fixed deposits for select tenures in the range of 0.05 per cent to 0.1 per cent.
The banker said that the deposit rate cut was initiated on the basis on India’s largest lender’s “own assessment of growth rate”.

Ahead of the announcement, the Street was divided on whether the RBI will hold rates or go for a rise. In a Reuters poll, 37 out of 63 economists last week said the RBI will raise rates, while 22 said the next hike would come later this year, or early in 2019.
The hike comes on back of rising retail inflation, which spiked to a a five-month high of 5 per cent in June on costlier fuel.The government has mandated the RBI to keep inflation at 4 per cent (+/- 2 per cent), the upside of which has now been breached for eight straight months.

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Earlier this month, the Union Cabinet steeply hiked the minimum support price (MSP) for kharif crops, including Rs 200 per quintal for paddy. A SBI research report notes that the MSP hike could statistically push up retail inflation by a further 73 bps. Moreover, global crude oil prices continue to remain volatile.
The next policy meeting is scheduled from October 3 to 5.