Mumbai: The Reserve Bank of India (RBI) raised the benchmark lending rate on Wednesday, by 35 basis points to 6.25% in a bid to tame inflation, which has remained above its tolerance level for the past 11 months. With the latest hike, the repo rate or the short-term lending rate at which banks borrow from the central bank now has crossed 6%.
This is the fifth consecutive rate hike after a 40 basis points increase in May and 50 basis points hike each in June, August and September. In all, the RBI has raised the benchmark rate by 2.25% since May this year. The six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das decided by majority view in favour of the rate hike. The Consumer Price Index (CPI) based inflation, which RBI factors in while fixing its benchmark rate, stood at 6.7% in October. Retail inflation has been ruling above the RBI’s comfort level of 6% since January this year. Das retained the inflation projection at 6.7% for the current fiscal.
The RBI has slashed its GDP growth forecast to 6.8% from an earlier estimate of 7% for the current fiscal. In its last bi-monthly policy review released in September, the RBI had slashed the economic growth projection for the current financial year to 7% from 7.2% earlier on account of extended geopolitical tensions and aggressive monetary policy tightening globally.
Repo rate is the rate at which commercial banks borrow money from the Reserve Bank of India. So, a hike in the lending rate by the central bank means an increase in the cost of borrowing for retail and other loans by the banks, which in turn is passed on to the borrowers. With this hike, the lending rates of banks are expected to go up as the cost of funds is expected to rise further. EMIs on vehicle, home and personal loans will also rise.
The external benchmark linked lending rate (EBLR) of banks will rise by 35 bps — one basis point is one hundredth of a percentage point— as such loans are linked to the Repo rate. As much as 43.6% of the total loans are now linked to the Repo rate. Marginal cost of funds-based lending rates (MCLR), which accounts for 49.2% of the loans portfolio of banks, are also expected to move up. The hike will help in moderating inflation in the country. Deposit rates are also expected to rise in the near future. SBI, India’s largest bank, now offers a 6.10% rate on one-year term deposits.
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