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Repo Rate, probably the most crucial rate set by the RBI, has been hiked again in June 2022. What is the meaning of repo rate? What are its implications, and what has been its trajectory lately? After the recent hike in repo rate, many have been left wondering what the year-end Repo Rate 2022 will look like.
The RBI repo rate is simply the rate at which the Reserve Bank lends on a short-term basis to the banks operating in our country. The current increased Repo Rate stands at 4.90% after the recent hike of 50 basis points done in the month of June by RBI. At the current repo rate, the Reserve Bank of India will lend to the banks at an interest rate of 4.90% for their short-term borrowing needs.
The RBI repo rate is decided by the six-member Monetary Policy Committee (MPC) headed by the RBI Governor. The current increase was announced unanimously by this six-member MPC during their last meeting held in June.
Repo rate influences the rate at which a bank lends to others as the Repo Rate is the rate at which banks borrow from the RBI making it a very instrumental part of the bank’s cost of funding. If the cost of funds for banks gets increased, the rate at which banks will lend to their customers, retail or corporate, will also increase.
With an increase in the cost of loans due to the increase in the interest rate charged by banks on loans, the demand for credit falls. People will be less willing to avail credit facilities at a higher cost, which in turn reduces the consumption demand for goods and services which would have otherwise been bought at credit by customers. Even for the existing borrowers, this can potentially mean an uptick in their EMIs or Equated Monthly Instalments, further driving down the disposable income or cash left with them and causing a dip in demand for goods and services.
After maintaining the status quo for the Repo Rate starting Mid-2020 till April-2022, the Reserve Bank of India has now probably decided to begin with the upward trajectory in Repo Rates. The following table covers all the changes introduced in the Repo Rate by the RBI starting in 2020 when COVID led to a global shock in supply and demand.
|Date||RBI Repo Rate (%)|
|6th February 2020||5.15%|
|27th March 2020||4.40%|
|22nd May 2020||4.00%|
|4th May 2022||4.40%|
|8th June 2022||4.90%|
It can be clearly seen from the table that after reducing the repo rate during the COVID time, RBI has been hiking the Repo Rate, making it reach the current Repo Rate level of 4.90%.
RBI uses Repo Rate as an important tool to control the price levels or inflation in the economy. Since inflation is mainly driven by an increase in demand, RBI makes credit expensive for the customers by directly increasing the cost of funding for banks. With the cost of credit getting higher, the demand falls and hence consumption takes a hit.
In recent times, inflation has been soaring up globally and it has been no different in India. To tackle inflationary pressures and supply shocks, RBI has started increasing the Repo Rate to curb inflation in the coming months. The RBI has forecast increase in inflation from 5.7% to 6.7% during 2022-23. This increase in inflation is driven by the expectation of an average monsoon during 2022 coupled with an increase in average crude oil prices.
As per the industry experts, given the global inflation and events like the Russia-Ukraine war causing shocks in the supply chain, RBI will have to continue this cycle of increase in Repo Rates for the coming quarters. So, the prospect of cheaper credit looks bleak for the Indian borrowers in the coming months.
Repo rate is one of the most important rates in the financial industry as it has an overarching impact on almost all the sectors of the economy. It serves as an important mechanism to control the level of inflation prevailing in the economy. The recent surge in the Repo rate by the RBI will make credit expensive for the people and corporations operating in India. It might get even more expensive in the coming quarters as the inflationary pressures can probably continue to exist for some time.
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