RBI’s Rate Hike

 What is in the News ?

• The Monetary Policy Committee (MPC) of the Reserve Bank of India on Wednesday hiked the key policy rate, the Repo rate or the rate at which the RBI lends funds to banks, by 25 basis points to 6.50 per cent in a bid to rein in retail inflation. 
• The RBI decision is expected to make all external benchmark linked (based on the Repo rate) loans costlier immediately.
• The RBI has also projected a GDP growth for the next fiscal at 6.4 per cent. Retail inflation is expected to be 5.3 per cent in FY24, the MPC said.
• It was a 4:2 majority decision by the RBI’s policy panel to hike the Repo rate, the sixth since May 2022, with MPC members Ashima Goyal and Jayanth R. Varma voting against the increase.
• In a majority 4:2 decision, the MPC also retained the stance on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Goyal and Varma also voted against the withdrawal of accommodation.

Impact of this Decision

• Lending Rates : 
• Expected to go up as the cost of funds for banks is going to rise further;
• EMIs on vehicles, home and personal loans will also rise;
• The external benchmark linked lending rate (EBLR) of banks will rise by 25 bps. As much as 43.6 per cent of the total loans are now linked to the Repo rate; and 
• Marginal cost of funds-based lending rates (MCLR), which accounts for 49.2 per cent of the loans portfolio of banks, are also expected to move up.
• Inflation :
• The hike in the Repo rate is expected to help moderate inflation in the country as the cost of borrowing will increase and the demand of people will thus decrease; and 
• The central bank has lowered the inflation target for FY23 from 6.7 per cent to 6.5 per cent – which is still above the RBI’s comfort level of four per cent. Inflation is expected to be 5.3 per cent in FY24. Inflation for Q4 of FY23 at 5.7 per cent as against 5.9 per cent.

 Growth Projection

• The RBI has projected GDP growth for the next fiscal (FY2024) at 6.4 per cent. 
• The MPC had slashed the GDP forecast for fiscal 2023 to 6.8 per cent in the December policy review from an estimate of 7 per cent earlier as risks continue to emanate from protracted geopolitical tensions, global slowdown and tightening of global financial conditions.

 Hawkish Stance So Far

• The  RBI’s Rate Hike has increased the repo rate by a cumulative 250 basis points to 6.50 per cent since May this year.
• In December 2022, the MPC hiked the Repo rate by 35 basis points in a bid to rein in retail inflation. 
• The MPC hiked the repo rate by 40 bps in May and then by 50 bps in each of the three successive meetings.

Practice Questions for Prelims

Consider the following statements regarding the recent policy rate hike by the Monetary Policy Committee :
1. This action has signaled towards the Accommodative Monetary Policy Stance of the RBI.
2. This action would increase both cost of borrowing and deposit rates.
3. This action was taken to put a downward pressure on the headline inflation rates.
Which of the above statements is/are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) All of the above

Ans. b)

Mains Practice Question

What is monetary policy? Evaluate the performance of the monetary policy committee in achieving its stated mandate by the 2016 amendment to the Reserve Bank of India Act, 1934.

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