RBI Raises Repo Rate by 25 Basis Points

The Reserve Bank of India raised the repo rate by 25 basis points on Wednesday, an announcement that comes days after several banks have already hiked interest rates for deposits and lending.

The announcement was made by the central bank’s six-member monetary policy committee, amid oil price rise, slumping rupee and concerns of food inflation as the minimum support price for several essential goods are expected to rise despite good monsoon forecasts.

The repo rate is the rate at which the central bank lends money to commercial banks. Repo rate is used by monetary authorities to control inflation.

Several market analysts said that RBI’s repo rate hike, the first in four years, should be seen as a positive sign by the equity market, but at the same time cautioned that banks may have to put their plans for any further interest rates hikes on hold until August, when the next RBI review meeting is expected to be held. 

Four banks – State Bank of India, Punjab National Bank, Kotak Mahindra Bank, ICICI Bank - have recently raised their interest rates using the marginal cost of funds-based lending rate (MCLR).

This means that anyone who has recently borrowed a home, personal or car loan under the MCLR would end up paying their monthly installments at higher interest costs.

According to banking experts, the rates will come up for revision at the next reset cycle, six months to a year from now.

 “I don’t see banks immediately hiking the rates, but eventually it will happen sometime during the end of this year,” Aashish Somaiyaa, Chief Executive Officer, Motilal Oswal AMC, said.

Somaiyaa said that Friday’s interest hike is a positive sign for the equity market, but the cycle may be turning for the fixed income portion, which is a bad sign. “For those holding long-term bonds, it is clearly an indication that the cycle has started,” he added.