MUMBAI: For the second time in a row, the Reserve Bank of India (RBI) on Wednesday raised repo rate — the rate at which RBI lends short-term money to banks — by 25 basis points (bps) to 6.5 per cent.
Earlier, repo rate was increased by 25 bps in June, breaking a four-year cycle of rate cuts. While the central bank hasn’t embarked on a rate-hike cycle yet, it doesn’t mean there won’t be further hikes going ahead. The RBI has maintained its ‘neutral’ stance, which means it has room to increase, or reduce, rates in October when it meets again to review monetary policy.
Wednesday’s move comes days after the country’s largest lender SBI raised deposit rates marginally by 0.05 per cent to 0.1 per cent, so across-the-board interest rates and EMIs on all retail products such as home and auto loans will likely shoot up this month and the next. Reverse repo rate — the rate at which RBI borrows money from commercial banks — too has been raised from 6 per cent to 6.25 per cent.
The increase in rates comes amid rising retail inflation, which shot up to 5 per cent in June — higher than the central bank’s mandated 4 per cent (plus or minus 2 per cent) target. In fact, headline inflation has been below the curve for eight straight months. “The main reason for changing the policy rate is to ensure that on a durable basis we come to and maintain the 4 per cent target. And we’ve been away from the 4 per cent target for several months now,” said RBI Governor Urjit Patel.
Meanwhile, GDP forecast for the current financial year remained unchanged at 7.4 per cent, but the banking regulator pegged CPI inflation at 4.2 per cent for the current quarter though it expects it to firm up to 4.8 per cent in the second half of the current fiscal. So, rise in prices of fruits, vegetables and other services will hit consumers’ pockets.
Urjit Patel warns of ‘currency wars’
RBI Governor Urjit Patel flagged concerns of a currency war. Stating that India must be careful not to add to the global risk profile, Patel said, “We are possibly at the beginning of currency wars. We must manage the risks that we can control. We have to run a tight ship.” He added that rising trade protectionism poses a grave risk to global growth prospects. “Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth,” he noted