Inflation finally hits RBI, pushes it to raise key policy rate, sudden and sharp

In an unscheduled meeting of the Monetary Policy Committee, the central bank, however, retained the accommodative monetary policy. The sudden RBI move — the first hike after August 2018 — is expected to push up interest rates in the banking system. Equated monthly instalments (EMIs) on home, vehicle and other personal and corporate loans are likely to go up. Deposit rates, mainly fixed term rates, are also set to rise.

By hiking the Repo rate and CRR, the RBI is aiming to keep inflation – which is already close to 7 per cent — at its desired level and control and monitor money flow into the banking system.

The hike in Repo rate – the key policy rate of RBI or the rate at which it lends to banks – means the cost of funds of banks will go up. This will prompt banks and NBFCs to raise the lending and deposit rates in the coming days. Analysts say that consumption and demand can be impacted by the Repo rate hike.

From the 8 per cent level in January 2014, Repo rate had fallen to 4 per cent by May 2020 after the RBI slashed the rates over the years to boost growth – the last cut was by 40 basis points in May 2020 to tackle the negative impact of Covid pandemic.

The 50 bps hike in CRR will suck out Rs 87,000 crore from the banking system. CRR is the percentage of depositors’ money that commercial banks have mandatorily to park with the Reserve Bank. The lendable resources of banks will come down accordingly. It also means the cost of funds will go up and banks’ net interest margins could get adversely impacted. If the RBI wants to infuse more liquidity into a system, it lowers the CRR and leaves banks with more liquidity to lend to their customers. On the other hand, if it wants to take out liquidity from the system, it increases the CRR rate.