The Reserve Bank of India on Thursday increased the repo rate by 25 basis points to 6.25% and the reverse repo rate to 6% from 5.75%. This was the first increase in repo rates since January 2014.
The Monetary Policy Committee headed by RBI Governor Urjit Patel made the decision after a two-day meeting – the second of the 2018-’19 financial year.
Repo rate is the rate at which the RBI lends money to commercial banks in the event of a shortfall of funds. Reverse repo rate is the rate at which the central bank borrows money from commercial banks in India. Changes in the repo rate affect bond yields and influence borrowing costs and loan rates.
The committee retained the growth forecast of 7.4% for the economy. Gross domestic product is likely to grow at 7.5% to 7.6% in the first half and 7.3% to 7.4% in the second half of the financial year.
The committee said it was optimistic about investment, and noted that consumption demand remained strong. “With improving capacity utilisation and credit offtake, investment activity is expected to remain robust even as there has been some tightening of financing conditions in recent months,” the Monetary Policy Committee said. “Global demand has also been buoyant, which should encourage exports and provide a further thrust to investment.”
Inflation has increased and economic growth has recovered in recent months, which has led to the increase in the interest rates. The central bank on Wednesday projected inflation for the 2018-’19 financial year at 4.8 to 4.9% in the first half and 4.7% in the second half of the year.
The monetary policy intends to keep inflation in check by adjusting the interest rates. Higher interest rates discourage lending and hence help in bringing the inflation down.
Meanwhile, the markets ended a three-day losing streak on account of the central bank’s decision. The BSE Sensex closed 275.67 points up at 35,178.88, while the broader NSE Nifty index closed at 10,684.65, up by 91.50 points. All sector gauges compiled by the National Stock Exchange ended higher led by the Nifty PSU Bank index’s 2.5% surge. Bharti Airtel, Tata Motors and Sun Pharmaceutical Industries saw their shares gain the most.