RBI hikes repo rate by 35 basis points to 6.25%

The Reserve Bank of India (RBI) on Wednesday hiked the key repo rate by 35 basis points to 6.25% as the inflation showed signs of easing. With the latest rate hike, which was in line with the market expectations, the apex bank has raised the repo rate by two percentage points in half a year. The RBI has also hiked the standing deposit facility (SDF) rate and the marginal standing facility (MSF) rate by 6% and 6.5% respectively.  

The central bank has also decided to remain focused on the “withdrawal” of the "accommodative" policy stance to ensure that inflation remains within the target going forward, while supporting growth. 

RBI Governor Shaktikanta Das said, “The Monetary Policy Committee (MPC) met on 5th, 6th and 7th December 2022. Based on an assessment of the macroeconomic situation and its outlook, the MPC decided by a majority of 5 members out of 6 to increase the policy repo rate by 35 basis points to 6.25 per cent, with immediate effect. The MPC also decided by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.”

“On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. These actions will strengthen the medium-term growth prospects of the Indian economy,” he added. 

Market analysts and industry leaders have expected the repo rate hike to be between 25 basis points to 35 basis points. With the latest rate hike, the repo rate has been hiked by 225 basis points this year. The apex bank hiked the repo rate by 40 basis points in an off-cycle meeting in May and by 50 basis points thrice since June this year. 

 The latest rate hike will ease the burden on the common man, thus lowering the interest rate on their monthly home loan, car loan and other EMIs. When the RBI lowers the repo rate, which is a key lending rate for banks, the interest on home loans, car loans, and other loans also lowers as retail loans are benchmarked to the RBI’s repo rate, with a quarterly reset clause. 

 Meanwhile, the U.S. Federal Reserve has hiked the key interest rates by 3.75 percentage points since March this year. It is expected that the US Fed will hike interest rates by 50 basis points in December. Moreover, last month, the Bank of England hiked the repo rate by 75 points. This is the bank’s biggest hike in 33 years.