The RBI's six-member MPC hiked the repo rate to 6.50 percent on February 8, as expected, and maintained the stance to "withdrawal of accommodation". This comes as retail inflation fell below the RBI's 6 percent threshold for three months in a row and the US Fed is slowing down its increase in interest rates.
RBI Monetary Policy refers to the policy of the Reserve Bank of India (RBI), the central bank of India, which deals with the control and regulation of the money supply in the Indian economy. This policy is aimed at maintaining price stability, employment and economic growth of the country.
The RBI uses various monetary policy instruments to achieve these objectives. The primary instruments used by the RBI to control money supply are open market operations, cash reserve ratio, statutory liquidity ratio and repo rate.
What is the repo rate?
Repo rate is a fundamental tool used by the Reserve Bank of India (RBI) to control and regulate the money supply in India’s economy. It is the rate at which commercial banks borrow funds from the central bank of India for short-term financial needs.
This rate is primarily used to control inflation and ensure economic stability. As it is a benchmark rate, it also affects other interest rates like those on fixed deposits, home loans, car loans and personal loans.
The RBI reviews its policy rates every two months, based on current economic conditions. Thus, when there is a need to stimulate economic growth, RBI reduces the repo rate and when there is a threat of inflation, it increases the repo rate.
How does a change in the repo rate affects you?
When the repo rate goes up, borrowing from RBI becomes more expensive and vice versa. The general public may not feel the impact of a rise or fall in the repo rate directly, but they will feel the effect through the changes in the interest rate charged by banks on their products. Banks usually increase their lending rates when the repo rate increases and reduce them when the repo rate decreases.
The RBI uses this key policy rate to control inflation in the country. A hike in the repo rate means that banks have to pay more to borrow funds from the central bank. This discourages them from borrowing and leads to a reduction in the money supply in the economy, thus controlling inflation.
Similarly, when the repo rate is cut, banks can borrow from the RBI at a lower rate and this leads to an increased money supply in the economy, subsequently leading to more spending, investments and economic growth.
What does a hike in repo rate mean for a common man?
A hike in repo rate means that banks will have to pay higher interest rates to borrow funds from RBI. This could lead to higher borrowing costs for consumers, as banks may pass on the increased cost to them.
For the common man, a hike in the repo rate has a direct effect on his pocket. It increases the cost of borrowing from banks and financial institutions. The loan EMIs, credit card payments and other loan payments become expensive. However, in contrast, fixed deposits become appealing in a rate increase situation since banks often raise interest rates on this type of investment vehicle.
A hike in the repo rate also affects inflation. It decreases the money supply in the market and reduces demand for goods and services. This acts as a deflationary pressure and can lead to lower inflation. Lower inflation means lower prices and more savings for the common man.
Thus, a hike in the repo rate has both positive and negative effects for the common man. On one hand, it leads to higher loan payments, whereas, on the other hand, it helps in controlling inflation and encourages saving, leading to more money in the pocket.