Explained: The RBI rate hike and its impact

News: Reserve Bank of India hiked the repo rate by another 50 basis points.

RBI is moving on with the withdrawal of its accommodative policy, in the backdrop of increasing inflation in the country. The RBI had pumped huge liquidity into the system in 2020 to counter the impact of the pandemic.

RBI has projected inflation at 7.5% in the June quarter and 7.4% in the September quarter. The main factors that will drive the inflation up can be food, energy, and commodity prices due to factors such as the Ukraine war, edible oil prices, global food shortage, etc.

Repo rate refers to the rate at which the RBI lends to commercial banks.

What are the implications of the increase in the Repo Rate for the economy?

It makes money expensive, thus discouraging demand in the economy. The effect will be more visible in the Non-discretionary spending i.e. essential and non-negotiable spending for example; rent, food, or mortgage payments.

Depositors are also expected to see an increase in the interest rates on their deposits.

It will make the loans expensive for the borrowers and increase the burden of interest on EMIs for loans such as home loans.

RBI is expecting that an interest rate hike will prevent any effect on discretionary spending which can slow down the growth rate.

Source: This post is created based on the article “Explained: The RBI rate hike and its impact”, published in Indian Express on 9^th June 2022.