In a big announcement on Wednesday, Reserve Bank of India Governor Shaktikanta Das said that the repo rate is being increased by 40 basis points and CRR (Cash Reserve Ratio) by 50 basis points. The decision was taken by RBI’s Monetary Policy Committee (MPC) in an off-cycle meeting held between May 2-4. After this hike, the repo rate has now increased to 4.40 percent and the CRR by 50 basis points to 4.50 percent.
Governor Shashikant Das said that due to increase in CRR, liquidity of Rs 83711.55 crore could be exhausted. The CRR hike will be effective from the midnight of May 21. After this hike, the loan EMI will become expensive. That is, if you pay a loan every month, then now you will have to pay more money.
After the announcement of RBI, HDFC Bank has increased its Retail Prime Lending Rate (RPLR) by 0.05 percent. The new rates will be valid from 1 May 2022.
What is repo rate and how important is it?
When commercial banks are short of funds, they borrow money from RBI. RBI lends money to these banks at a particular rate which can be called as repo rate. Repo rate is changed or unchanged by RBI from time to time. The decision taken by the RBI decides whether inflation has increased or decreased.
What does repo rate hike mean?
With the RBI raising or lowering rates, it will be costly or cheaper for commercial banks to borrow. Repo rate and inflation rate are opposite to each other. If the repo rate is high, the inflation rate will be low, whereas if the repo rate is low, the inflation rate will be high.
what will be the effect
The RBI decision to increase the repo-rate is likely to increase the Equated Monthly Installment (EMI) on your bank loans- home, vehicle, other personal and corporate loans etc. After the increase in the repo rate after almost four years, the deposit rates are also set to increase. The hike will prompt banks and NBFCs to increase lending and deposit rates in the coming days. However, analysts say a hike in the repo rate could impact consumption and demand. RBI last increased the repo rate by 25 bps to 6.50 per cent in August 2018.
Some banks have increased interest rates
At the same time, even before this decision of RBI, State Bank of India, Bank of Baroda, HDFC, ICICI and Yes Bank have increased the EMI of the loan. This increase has been done at different basic points.
What will be the effect of hike in cash reserve rate?
CRR is the percentage of depositors’ money that commercial banks are compulsorily required to keep with the Reserve Bank. An increase of 50 bps in CRR will remove Rs 87,000 crore from the banking system. This also means that the cost of funds will go up and the net interest margin of the banks may benefit.