RBI and MPC Meet June 2022 : Repo Rate Hikes Again to Reduce Inflation

The six members of the Monetary Policy Committee (MPC) of the Reserve Bank of India mutually increased the base points of the repo rate. Repo rates are the key policy rate the central bank considers when short-term lending funds to banks. It increased by 50 base points, standing at 4.9% as of 8th June 2022. Even in May 2022, there was an off-cycle meeting where the members of MPC increased the repo rate.

This significant step is taken after RBI’s accommodative policy’s withdrawal as a return to rising inflation. This decision will further raise the interest rates of the banking system.

Let’s walk through the highlights, impacts and expert opinions below.

Table of Contents

Key Highlights Stated by RBI in a Meeting With MPC

Currently, the six members of the Monetary Policy Committee are Shaktikanta Das (Governor of RBI), Dr Michael Debabrata Patra (Deputy Governor), Dr Mridul K. Saggar, Prof. Jayanth R. Varma, Dr Ashima Goyal and Dr Shashanka Bhide. They decided to increase the repo rate by 50 basis points which increased by 4.9%.
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The revised inflation projection for the Financial Year 2023 is changed from 5.7% to 6.7%. Also, the RBI governor said, “inflation will likely remain above 6% in the first three quarters of the current Financial year. Our steps will be calibrated, focussed on bringing down inflation to the target level.”
The central bank decided to raise the MSF Rate (Marginal Standing Facility) and Bank rate to 5.15% from 4.65%. This was announced by RBI Governor Shaktikanta Das.
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Impact of Heightened Repo Rates to 4.9% by RBI

The repo rate increased in May, after which many banks increased their lending rates for both new and existing borrowers. Additionally, several NBFCs and Housing Finance Companies also announced an increase in their lending rates.

The repo rate affects the banks because the central bank provides funds to other banks at this rate. As a result, the borrowing cost for retail and other borrowers skyrocketed after the increased repo rate.

The immediate consequence of increased repo rate is visible in the retail loans such as house loans, cars and personal loans linked to the bank’s business model. As a response, Several banks have linked their lending rates to the RBI repo rate, which immediately affects the borrowers.

Repo rate is directly proportional to RLLR (Repo Rate Lending Rate). If the Repo rate goes up, so will RLLR.

It means an increase in interest rates on retailer loans. To know the effect of increased repo rate, read here.

Several banks increase their loan tenure instead of increasing the EMI amount. However, the MCLR (Marginal Cost of Funds based Lending Rate) loan borrowers will not feel the hike instantly. Further, the RBI repo rate hikes have pushed the cost of funds, which was revised after the arrival of re-set dates. The re-set dates in MCLR linked loans are usually 12 months and six months for some banks.

Here is the list of banks who have increased their interest rate after the hike in repo rate by MPC and RBI.

ICICI Bank
Bank of Baroda
Punjab National Bank
Bank of India
HDFC Ltd.
Indian Overseas Bank
HDFC Bank

Nonetheless, one thing is clear: the interest rate will go up and down regularly. The only way to save EMI costs or reduce the loan burden is to pay the outstanding loan amount quickly.

Experts’ Opinions from the Finance And Banking Sector

Repo Rate Hike in Line With Expectations

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, said, “The increase in repo rate in June is a continuation of the off-cycle policy while focusing on inflation. The decision of increasing the repo rate by 50 bps and the inflation estimate by 100 bps is next in line with market expectations. Further, we expect the RBI to increase the repo rate continuously to ensure a neutral policy rate. It is also expected that there might be a 50 bps hike in CRR to 5% by the end of the Financial Year 2023 to move liquidity conditions towards the pre-pandemic levels.”

Views on RBI Monetary Policy

Nilesh Shah, Group President & MD, Kotak Mahindra Asset Management Company, said, “RBI has taken the rising inflation, slow growth, and reducing liquidity among several global uncertainties of Ukraine into serious consideration. Further, withdrawal of accommodation and 50 bps repo rate hike is the continuation of policy and market expectations.”

He further stated that “RBI will need skills and luck to contain the rising inflation and to support the growth of the country.”

Forward Steps Towards a Series of Rate Hikes

Naveen Kulkarni, Chief Investment Officer, Axis Securities, said, “Post the off-cycle announcement of a rate hike in May’22, paving the way for a series of rate hikes in the following meetings, the RBI increased the repo rate by 50bps. The MPC has decided to focus on calibrated withdrawal of accommodation while supporting growth. We believe the market had already discounted a rate hike of 40-50bps, and the key monitorable was a commentary on inflation. We may witness another rate hike, probably of a similar quantum, in the next monetary policy to manage inflationary pressures.”