The Reserve Bank of India (RBI) on Wednesday increased the policy repo rate by 25 basis points to 5.50%. The decision was taken by the Monetary Policy Committee (MPC) during its latest meeting.
A rise in the repo rate means banks may have to pay more when borrowing short-term funds from the central bank. As a result, lenders could increase interest rates on loans linked to external benchmarks.
This may make home loans, vehicle loans, personal loans and business loans more expensive. Existing borrowers with floating-rate loans could also see their monthly EMIs rise or their loan repayment period increase.
Policy stance changed to calibrated tightening
Along with the rate hike, the RBI changed its monetary policy stance from “neutral” to “calibrated tightening”. The shift indicates that the central bank is now placing greater emphasis on controlling inflation and may remain cautious about future rate cuts.
The move comes after nearly three-and-a-half years without a repo-rate increase. It also signals a reversal in the direction of monetary policy after a period in which the RBI had focused on supporting economic growth through lower borrowing costs.
Why did the RBI raise rates?
The RBI’s decision is linked to concerns over rising inflationary pressure, higher global interest rates and uncertainty in the international economy. A higher repo rate can help control demand and ease price pressures, although it may also slow borrowing and spending.
The central bank is expected to closely monitor food prices, fuel costs, global market conditions and domestic economic growth before taking its next decision.
Impact on borrowers and savers
Borrowers with floating-rate loans are likely to feel the impact first. Banks may revise lending rates, increasing EMIs for new and existing customers.
However, savers could benefit if banks raise interest rates on fixed deposits and other savings products. The extent of the impact will depend on how quickly banks pass on the RBI’s rate increase.
The latest decision shows that inflation control has become a priority for the RBI, even though higher interest rates could increase financial pressure on borrowers.
