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Banker's Bank RBI in an off-cycle monetary policy review meeting headed by RBI governor Shaktikanta Das on May 4 increased the repo rate by 40 basis points to 4.40 per cent. This is the first hike in the repo rate since August 1, 2018. Before this, the bank decreased the repo rate by 0.4 per cent to 4 per cent on May 22, 2022, without any schedule. The step has been taken to tame inflation, high crude oil prices and a global shortage of commodities.
Shaktikanta Das announced that Monetary Policy Committee (MPC) had met over the previous two days and decided to raise the benchmark interest rate in the economy.
Following this, an increase in the CRR(Cash Reserve Ratio) was a "double whammy" for the markets and more such tightening moves can be expected from the RBI, experts said.
RBI has made the changes in:
- Repo Rate: 40 basis points to 4.40%
- Reverse Repo Rate: 3.35%
- Cash Reserve Ratio: 50 basis points to 4.50%
- SDF Rate: 4.15%
- MSF Rate: 4.65%
What are RR, RRR and CRR?
- RR( Repo Rate) is the rate at which commercial banks borrow money from the Central Bank. For example, if the commercial bank borrowed 1,00,000 from RBI with a 20% repo rate, the interest paid to the RBI will be 20,000.
- RRR(Reverse Repo Rate) is the rate at which RBI borrows money from banks for the short term.
- CRR( Cash Reserve Ratio) is the percentage of cash at which banks keep in reserve their total deposits. It is mandated by the RBI to maintain these reserves in the form of liquid cash.
How does it affect you?
From this decision, the banks will also increase their lending rates which will affect particular home loans, personal auto loans, and deposits in bank and stock market as well.
- Home Loan- This comes under the repo-linked lending rate, which results in a subsequent increase in other loans and EMI. At present, the home loan rate of more than two dozen banks is less than 7%. Now floating rate loans will become costlier. A floating rate changes periodically. All new loans will also be expensive. If it is a floating loan then the EMI can be fixed for one period but the loan period will increase.
- Personal-auto loan - As interest rates are fixed so existing borrowers do not need to worry. EMI and interest rates will remain the same, new loans will be expensive.
- Money deposited in Bank - Bank deposits, small savings and corporate deposits are likely to be raised. Long term bond yields are rising which results in a decline in the mutual fund. Interest income may increase although inflation is high and real returns from fixed income instruments may remain negative.
- The effect from rising CRR - CRR has raised by 50 basis points to 4.50 per cent which will reduce the 87,000 crores bank's cash. A rise in CRR means that now banks will have to deposit a larger portion of their fund with RBI than before, leaving them with less amount to lend. With this, the pace of money coming into the markets will also be slow.
- Stock Market - The announcement also affected the stock market.BSE Sensex closed at 55,669.03 declining by 1306.96 points or 2.29%. The benchmark had touched an intraday low of 55,501.60. After recording a fall of 391 points, NSE Nifty settled below 16,700.
RBI has made it clear that the challenges will not subside now, there is a fear that inflation may increase further.
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