The Reserve Bank of India on Wednesday increased the repo rate by 25 basis points to 6.5% and the reverse repo rate to 6.25%. This is the third bi-monthly policy review of the 2018-’19 financial year.
The repo rate is the rate at which the RBI lends money to commercial banks in the event of a shortfall of funds. The reverse repo rate is the rate at which the central bank borrows money from commercial banks in India. The marginal standing facility rate and the bank rate have been adjusted to 6.75%.
The Monetary Policy Committee headed by RBI Governor Urjit Patel made the decision after a two-day meeting. Five of the six members on the rate panel voted for an increase. This the first time since October 2013 that the RBI has increased the repo rate at two consecutive policy meetings.
Patel said the panel’s decision was influenced by the rise in inflation over the last three months. “Financial markets remain unsettled, capital flows to emerging markets have declined with a firming United States dollar,” Patel said. “Households reported an uptick in inflation expectations, manufacturing and services firms indicate elevated input costs and wage growth while the organised sector remained stable.”
Changes in the repo rate affect bond yields and influence borrowing costs and loan rates. “Loans will get marginally costlier,” Adhil Shetty, the chief executive officer of BankBazaar.com, told NDTV. “On a loan of Rs 1 lakh for 20 years at an interest rate of 8.5%, the EMI is Rs 868. If the rate rises to 8.75%, the EMI increases to Rs 884.”
Industrial growth, measured by the index of industrial production, strengthened in April-May 2018 on a year-on-year basis. This was driven by a significant turnaround in the production of capital goods and consumer durables. Retail inflation, measured by the year-on-year change in the Consumer Price Index, rose from 4.9% in May to 5% in June, driven by a slight increase in inflation in fuel.
The committee said that it expects inflation at 4.6% in the second quarter, 4.8% in the second half of 2018-19, and 5.0% in the first quarter of 2019-’20.
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.
In the April policy review, RBI kept the repo rate and the reverse repo rate unchanged at 6% and 5.75%. At the meeting, the RBI lowered the retail inflation target for the first half of the 2018-’19 financial year to 4.7% from 5.1% on the grounds of a normal monsoon forecast and moderation in food price rise. For the second half 2018-’19, it has predicted an inflation outlook of 4.4%, lower than its last forecast of 4.5% to 4.6%.
The rupee was trading at 68.50 against the dollar at 4.50 pm. Benchmark indices BSE Sensex and Nifty 50 closed on a negative note. The Sensex ended 85 points lower at 37,521.62 points and the Nifty 50 too slipped 10.30 points to close at 11,346.20.