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RBI hikes Repo rate by 25 bps to 6.5%, what impact will this have?

GS Paper 3

 

Syllabus: Indian Economic, Banking

 

Source: TH, TH, IE 

Context: The Monetary Policy Committee (MPC) hiked the Repo rate (or the rate at which the RBI lends funds to banks), by 25 basis points to 6.50 per cent in a bid to rein in retail inflation.

  • RBI has projected GDP growth for the next fiscal (FY2024) at 6.4%

 

Impact of raising the Repo rate:

  • Lending rates of banks are expected to go up, leading to a rise in EMIs on vehicles, homes, and personal loans.
    • Over 43% of the total loans are linked to the Repo rate and are expected to rise now
  • Lower Inflation: The hike in the Repo rate is expected to help moderate inflation in the country as the cost of borrowing will increase and the demand of people will thus decrease.

 

What is a hawkish stance?

 

Reason for RBI’s hawkish stance: It could be due to its outlook on India’s slower economic growth and higher inflation in 2023-24.

 

This is box title
  • Monetary policy deals with the supply and cost of money in an economy.
  • The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth.
  • The amended RBI Act, 1934provides for the inflation target (4% +-2%) to be set by the Government of India, in consultation with the Reserve Bank, once every five years.
  • The latest monetary policy review was significant because it was made to bring inflation back to the target level of 4%.

 

This is box title

As per the Amended (in 2016) RBI Act, 1934: The central government is empowered to constitute a six-member Monetary Policy Committee (MPC) to determine the Policy Rate required to achieve the inflation target”.

  • Its decisions are binding on the Bank.
  • Eligibility criteria to be a member: Must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”

 

Insta Links

 

Prelims Links

Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? ( UPSC 2017)

  1. It decides the RBI’s benchmark interest rates.
  2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
  3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only

 

Answer: A

 

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? ( UPSC 2020)

  1. Cut and optimise the Statutory Liquidity Ratio
  2. Increase the Marginal Standing Facility Rate
  3. Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

 

Answer: B