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RBI hikes repo rate for second consecutive time
Why in the news ?
- The Reserve Bank of India (RBI) resorted to a back-to-back interest rate hike for the first time in almost five years to curb inflation.
Details
- The central bank’s six-member monetary policy committee on Wednesday voted 5-1 to raise policy rates by 25 basis points to 6.5%.
- The increase will push up the cost of loans for all borrowers.
- It raised interest rates by 25 basis points in its June meeting.
Causes
- The move was necessitated by the need to contain retail inflation after it quickened to 5% in June.
- Mounting domestic and global uncertainties.
- As per the RBI, MSP hike is the major factor stoking inflation this year. The government has fixed MSP at 150% of the cost of production of all kharif crops.
- RBI also highlighted its concerns over crude oil prices, which remain elevated, despite seeing a slight moderation.
Impact
- The increase will push up the cost of loans for all borrowers, from consumers looking to finance their purchases of homes and cars to businesses looking to meet their capital needs.
- The development also had its impact on the stock market, with the BSE index Sensex plunging from a record high to end 84.96 points lower at 37, 521.62.
- Banks are preparing to pass on the higher rate to borrowers. With the country’s largest lender, State Bank of India, having raised its long-term deposits rates
Repo rate
- Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
- Repo rate is used by monetary authorities to control inflation.
- In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
- The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.
Source
The Hindu,LiveMint