RBI raises repo rate by 25 basis points to 6.5% from 6.25%

Reserve Bank of India repo rate: The Reserve Bank of India (RBI) Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) has raised the repo rate by 25 basis points to 6.5 per cent on Wednesday from 6.25 per cent. Repo Rate (RR) is the rate at which the central bank lends money to commercial banks or financial institutions, public or private, in India against government securities. Das said that four MPC members voted in favour of the repo rate revision versus two members. The central bank said that its policy stance remains focused on the withdrawal of accommodation.

"Repo rate now in positive territory. Further action is warranted in India," noted RBI Governor Das.

The current policy rates:

> Standing Deposit Facility (SDF) rate: 6.25%

> Marginal Standing Facility (MCF) rate: 6.75%

In the RBI's December monetary policy review, the central bank raised the key benchmark interest rate by 35 basis points. This is the sixth time the interest rate has been hiked since May 2022. The central bank has also hiked the short-term lending rate by 250 basis points to contain rising inflation. The policy rates before the February revision stood at:

Repo Rate: 6.25%
Standing Deposit Facility Rate: 6.00%
MSF Rate: 6.50%
Bank Rate: 6.50%
Reverse Repo Rate: 3.35%
CRR: 4.50%
SLR: 18.00%

"Policy rate at 6.5 per cent still trails the pre-pandemic level," Das said, adding that core inflation will remain sticky. Core inflation generally refers to inflation in manufactured goods.

As per experts, the latest revision of repo rates could be the final increase in RBI's current tightening cycle, following which there can be a pause.

Das noted that the global economic outlook is not as grim as it was a few months ago. Inflation still remains well above the target in major economies. The situation remains fluid and uncertain.

He added that the Indian economy remains resilient and that the real GDP growth is estimated at 7 per cent in 2022-23.

Das said that several central banks have lowered the pace of rate hikes or paused rate hikes. However, core inflation remains sticky. He said that inflation in India will rule above 4 per cent target. Also, further monetary policy action is warranted in India. Das added that the retail inflation will average 6.5 per cent in the current fiscal and moderate to 5.3 per cent in 2023-24.

On Tuesday, US Federal Reserve Chairman Jerome Powell too said that inflation is beginning to ease, though he added that it will be a long process and cautioned that interest rates could rise more than markets anticipate if the economic data doesn’t cooperate. “The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” Powell said.

"The RBI as expected hiked repo rate by 25 bps. The split mandate of 4-2 was also as expected. The stance too was unchanged which is in line with the excess liquidity continuing to be tightened. We see the RBI remaining concerned about inflation, especially core inflation. We expect inflation to average around 5.2% in FY2024 with adverse risks to growth likely to increase. The RBI will likely become increasingly data dependent and look at the impact of the past rate hikes on inflation-growth dynamics. We expect the RBI to pause from the next policy onwards with a likely shift in stance to neutral as the liquidity tightens further over March-April," said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

"Global economic volatility and uncertainty and surging inflation have prompted the RBI to make another policy rate hike, taking the repo rate to 6.5%. The silver lining is that the inflation is likely to moderate in 2024-25 and the RBI seeks to bring down the inflation to its target levels - within 4%. The smaller rate hike today can also be attributed to softening of retail inflation and the US Federal Reserve moderating the pace of increase in its benchmark interest rate. In December, the apex bank raised the key benchmark interest rate (repo) by 35 basis points (bps) after delivering three back-to-back increases of 50 bps. The recent hike will burden existing borrowers, and new borrowers will have to borrow at higher interest rates. It will make retail loans such as home, auto, and personal loans and others costlier, and borrowers will have to be ready for higher monthly EMIs or tenor extensions, or both. When the repo rate rises, it becomes more expensive for banks to borrow from the central bank, and as a result, they often pass on the increased cost to their customers in the form of higher interest rates on loans. It means that loan borrowers may have to pay more in interest, which can increase their monthly repayments. This can affect their financial situation, especially if they have multiple loans or a limited income," said Adhil Shetty, Chief Executive Officer (CEO) and Co-founder of Bankbazaar.com. 

“The 25 basis points rate hike by the Reserve Bank of India today has been in line with the consensus expectations. We, however, felt the possibility of a rate pause this time around was at least 50%. On the inflation front, the major softening in India post April 2022 was there main reason for us to expect a standstill in this policy. On the contrary, the Reserve Bank of India seems to have been more bothered about the high and sticky core inflation for more than a year. More importantly, the continued rate hikes by the Bank of England, the ECB, and the US Federal Reserves and the implications of these in the foreign exchange market influenced the decision of the Reserve Bank of India to go for another rate hike. Unless there is an unexpected flare in inflation, we would expect the Reserve Bank of India to maintain unchanged policy rate for the remainder of 2023. This would be positive both for the debt and equity markets,” said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers.

“The 25bps hike in REPO rate announced by the RBI is a well-balanced approach between handling inflation and economic growth. This was expected by the industry as inflation rate has remained above the tolerance band, though it has softened in the last few months. This hike will further help moderate inflation in the economy. A 25bps hike in Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rate respectively to withdraw surplus liquidity would further support in stabilizing inflation in the economy. Since the beginning of the rate hike cycle, which began in May 2022, the RBI has hiked its repo rate by 250 bps. With an MCLR rate of 8.4%, about 60% of the repo rate hike, so far, has already transmitted into the lending rates. Thus, the borrowing costs have significantly increased across the product categories including the housing sector. Post today’s rate hike, borrowing costs could be expensive by another 10 – 15 bps, on an immediate basis," said Shishir Baijal, Chairman & Managing Director, Knight Frank India