RBI Finally Bites The Bullet, Increases Repo Rate By 25 Basis Points     

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday (6 June) voted unanimously to hike repo rate by 25 basis points to 6.25 per cent, in a first interest rate increase in four-and-a-half years, the Times of India has reported.

The repo rate is the rate at which the RBI lends short-term money to banks. The central bank has also increased the reverse repo rate – the rate at which the RBI borrows from commercial banks – to 6 per cent.

During its second bi-monthly monetary policy review of the ongoing fiscal, all six members including RBI Governor Urjit Patel voted for a 0.25 per cent rate hike. Earlier, in four previous policy reviews, the RBI's six-member MPC left the repo, or short-term interest rate for commercial banks, unchanged at 6 per cent.

Patel said that "the rates have been hiked after a prolonged pause".

The RBI also revised upwards the retail inflation range to 4.8-4.9 per cent in the first half of 2018-19, and 4.7 per cent in the second half.

However, the move comes as a bad news for those who have borrowed from banks because it is likely to lead to an increase in the interest they pay on loans, be it home loan, car loan or personal loan. When the RBI increases the repo rate, banks usually pass on the burden to the customers.

According to a report in the Economic Times, the rate increase is expected to trigger a spike in bond yields, thus raising further inflation risks.