Loans May Get Costlier as RBI Raises Repo Rate to 6.25% in First Spike Since January 2014

New Delhi: The Reserve Bank of India (RBI) raised the repo rate to 25 basis points to 6.25 percent from the earlier 6 percent in the June bi-monthly policy meet on Wednesday. The reverese repo rate has been raised to 6 percent from the earlier 5.75 percent, raising the key rate by 25 basis points.

The six-member Monetary Policy Committee (MPC) kept its stance neutral, despite a repo rate increase. All of the six members of the MPC, including Governor and MPC Chairman Urjit Patel, voted in favour of a rate hike.

Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks.

The hike comes after a gaps of four-and-a-half years.

RBI also revised its retail inflation estimate for 2018-19 to 4.8-4.9 per cent for the first half, and 4.7 per cent for the second. The MPC said that a sharp and durable increase in global crude oil price was seen as a key risk to retail inflation.

Illustration by Mir Suhail.

The central bank retained its gross domestic product (GDP) growth projection at 7.4 per cent for 2018-19.

The Reserve Bank of India (RBI) in its first bi-monthly monetary policy meeting in April had kept the interest rates unchanged at six percent, however, according to experts the central bank’s outlook towards the economy seems to have changed.

"The decision of the Monetary Policy Committee (MPC) is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth," the RBI had said in its April statement.

A hike in the rates will increase the lending rates by the banks to maintain their profit margins, adding pressure on the common man to pay up more money on loans, pinching the politically important middle class and weakening the already lagging investment climate in the country.

India's top three banks in terms of lending — State Bank of India, ICICI Bank and Punjab National Bank — have increased their marginal cost of lending rates (MCLR) by 10 basis points, with effect from June 1, 2018, ahead of the RBI policy meeting.

This may further go up, depending on the decision taken by the Monetary Policy Committee (MPC) on Wednesday.

It will certainly have some impact on the quality of some of the more aggressive loans lent by non-bank finance companies in the past year.

Earlier in the day, markets opened higher ahead of the RBI policy announcement. The BSE Sensex rebounded over 69 points in opening trade, breaking its three-day losing run. The 30-share index recovered by 69.38 points, or 0.19 per cent, to 34,972.59. It had lost 419.17 points in the previous three sessions.

Sectoral indices led by FMCG, auto, metal, IT and capital goods rose by up to 0.30 per cent. The NSE Nifty also went up by 22.65 points, or 0.21 per cent, to 10,615.80.

The rupee, meanwhile, had weakened further against the US dollar in choppy trade on Tuesday, falling by 4 paise to end at 67.15. Currency traders and speculators were cautious ahead of the rate-setting MPC review decision.