Friday, Feb 03, 2023

RBI hikes key interest rate by 35 bps: what does this mean?

Fight against inflation remains major concern, growth forecast is lowered to 6.8 pc from 7 pc this fiscal

Reserve Bank of India Governor Shaktikanta Das announces the bi-monthly monetary policy, Wednesday, Dec. 7, 2022. (PTI Photo)

Signalling a further rise in lending and deposit rates, the Monetary Policy Committee (MPC) of the Reserve Bank of India on Wednesday (December 7) hiked the key policy rate, the repo rate or the rate at which the RBI lends funds to banks, by 35 basis points to 6.25 per cent in a bid to rein in retail inflation.

The MPC also lowered its growth forecast to 6.8 per cent from 7 per cent for the current financial year amid concerns over the “bleak” global economic outlook, and retained its retail inflation forecast at 6.7 per cent.

RBI rate hike: Was the decision unanimous?

The hike in Repo rate, fifth since May 2022, was a majority decision of the six-member MPC, headed by RBI Governor Shaktikanta Das, with five members recommending the increase. The MPC also decided by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation.

What impact will the RBI’s decision have?

Lending rates of banks are expected to go up as the cost of funds is expected to rise further. EMIs on vehicle, home and personal loans will also rise. The external benchmark linked lending rate (EBLR) of banks will rise by 35 bps — one basis point is one-hundredth of a percentage point— as such loans are linked to the Repo rate. As much as 43.6 per cent of the total loans are now linked to the Repo rate.

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Marginal cost of funds-based lending rates (MCLR), which accounts for 49.2 per cent of the loans portfolio of banks, are also expected to move up. The hike will help in moderating inflation in the country.

Deposit rates are also expected to rise in the near future. SBI, India’s largest bank, now offers a 6.10 per cent rate on one-year term deposits.

Why did the Monetary Committee raise the rate?

The RBI has hiked the policy rate in a bid to bring down inflation from the current level. Inflation in October eased to 6.77 per cent, a three-month low, but it remains well above the RBI’s comfort level of 4 per cent. But the worry for the central bank is the rise in core inflation — the non-food, non oil part of inflation — that edged up again after moderating over the summer.


Also households’ inflation expectations remain high as food price inflation continues to remain elevated. Weakness in the rupee against the US dollar is adding to inflationary concerns at the RBI given that a third of the CPI basket consists of import.

How has the interest rate moved in recent cycles?

The RBI has raised rates by a cumulative 225 bps since the start of the tightening cycle in April 2022, lagging behind the US Federal Reserve’s 350 bps increases over the same period. The last three hikes in the Repo rate were by 50 bps each.

The RBI has already intervened to support the rupee and further rate rises are likely to support the currency and to curtail underlying inflationary pressure. Analysts expect the central bank to raise the rate to 6.50 per cent by February 2023 and then hold this rate throughout the rest of 2023.


If the retail inflation cools down, the RBI is likely to pause the rate increases in 2023.

Rate hikes since May 2022.

How has the rate transmission progressed?

According to the RBI, the weighted average lending rates (WALRs) on fresh and outstanding rupee loans have increased by 117 bps and 63 bps, respectively, during the period of May to October 2022. On the deposit side, the weighted average domestic term deposit rate on fresh and outstanding deposits increased by 150 bps and 46 bps, respectively, during the same period. “We are keeping a close watch on this process of transmission,” Das said.

What is the RBI’s growth and inflation forecast?

Under the flexible inflation targeting framework, the RBI is expected to maintain retail inflation at 4 per cent (+/-2 per cent). The rate-setting panel lowered the real gross domestic product (GDP) for fiscal 2022-23 to 6.8 per cent from 7 per cent in the previous projection announced during the September policy. The MPC retained the inflation projection at 6.7 per cent for 2022-23.

First published on: 07-12-2022 at 10:56 IST
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