RBI hikes repo rate by 25 bps in Monetary Policy 2023: What is repo rate, reverse repo rate & monetary policy?
Repo rate hike by 25 bps in Monetary Policy
RBI hikes repo rate: RBI Governor Shaktikanta Das released the Monetary Policy statement on Wednesday, February 8, 2023. The Monetary Policy 2023 includes an increase in the repo rate by 25 basis points (bps) which was widely anticipated. In the December review of the Monetary Policy, the Reserve Bank of India raised the prime benchmark interest rate by 35 bps. The RBI has advanced the short-term lending rate by 250 bps since May 2023. The central bank said the decision was to control inflation. The RBI governor said the central bank will keep a check on the constantly changing economic situation.
According to the Monetary Policy 2023, the RBI has increased the repo rate to 6.25 per cent with immediate effect. The Reserve Bank of India has increased the repo rate for the sixth time. The repo rate hike decision will directly affect one's monthly EMIs as banks would increase their interest rates on retail loans.
Keeping in mind the impact of the repo rate hike on citizens, we have compiled a list of significant terms of RBI's monetary policy review meet.
What is monetary policy?
The RBI's monetary policy is the compilation of financial measures that safeguard and promote India's economic growth. The primary goal of RBI's monetary policy is retaining price stability without losing the growth objective. The monetary policy regulates the overall money supply to commercial banks. It has a direct impact on individual users and companies.
What is repo rate?
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When commercial banks loan by selling their securities to the Reserve Bank of India, the RBI charges them an interest rate. This interest rate is called the repo rate in the monetary policy. Repo rate hike indirectly affects the interest rates of car loans or home loans. Currently, the repo rate per the Monetary Policy 2023 is 6.25 per cent.
What is reverse repo rate?
The opposite of the repo rate is reverse repo rate. The RBI pays interest to commercial banks when they hold surplus cash reserves. The RBI uses a reverse repo rate to maintain the cash flow in the economy. The reverse repo rate is 3.35 per cent per Monetary Policy 2023.
What happens when RBI hikes repo rate?
When RBI hikes the repo rate, the cost of borrowing increases. When of cost of borrowing increases, all types of loans become expensive. Moreover, a repo rate hike directly impacts debt mutual funds. Thus, a repo rate hike could stifle investors' confidence in the stock market.