Repo Rate Hike

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Context:

The Monetary Policy Committee (MPC) of the Reserve Bank of India hiked the Key Policy Rate-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.

Read about REPO Rate: https://www.iasgyan.in/daily-current-affairs/repo-rate#:~:text=THE%20RECENT%20SUDDEN%20RISE%20IN,rate%20now%20stands%20at%205.40%25

Recent Hike in Repo Rate:

The Reserve Bank of India (RBI) has hiked the repo rate for the sixth time in a row, by 25 bps to 6.50% with immediate effect.
After the RBI's latest repo rate hike on February 8, banks are expected to raise interest rate in retail loans.

Implications

With the raising of key benchmark interest rate by 25 basis points to 6.5 percent, there will be a direct impact on both bank depositors and new loan borrowers.
Since the Repo rate is hiked the banks will now have to pay a higher amount of interest to the RBI which in turn shall be collected from the retail/ corporate borrowers of the banks. This would result in higher interest outflow on loans taken from the banks. Thus, the loans in general will become costlier by 1-2%.
As the repo rate rises, banks increase the interest rate on their consumer loans.

Inflation forecast:

The central bank has lowered the inflation target for FY23 from 6.7 per cent to 6.5 per cent – which is still above the RBI’s comfort level of four percent. Inflation is expected to be 5.3 percent in FY24.
Inflation for Q4 of FY23 at 5.7 percent as against 5.9 percent.