Journalism of Courage
Interest rates in the banking system are set to go up after the Reserve Bank of India (RBI) on Wednesday (May 4) jacked up the Repo rate, the main policy rate, by 40 basis points to 4.40 per cent and the cash reserve ratio (CRR) by 50 basis points to 4.50 per cent to suck out liquidity and bring down the elevated inflation.
However, the central bank retained the accommodative monetary policy in an unscheduled meeting of the Monetary Policy Committee (MPC) on Wednesday.
What will be the impact?
Equated monthly instalments (EMIs) on home, vehicle and other personal and corporate loans are likely to go up. Deposit rates are also set to rise after the Repo rate hike that came after nearly four years.
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 at a time when the global economy is facing turbulent times.
What does the Repo rate hike mean?
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 for banks will go up. This will prompt banks and NBFCs to raise the lending and deposit rates in the coming days. However, analysts say that consumption and demand can be impacted by the Repo rate hike. The RBI last hiked the Repo rate by 25 bps to 6.50 per cent in August 2018.
SBI and many banks recently raised the MCLR (marginal cost of funds-based lending rate) points anticipating a rate hike. “It is necessary for monetary policy to focus on the withdrawal of accommodation,” RBI Governor Shaktikanta Das said on Wednesday.
What will be the impact of the CRR hike?
CRR is the percentage of depositors’ money that commercial banks have to mandatorily park with the Reserve Bank. The 50 bps hike in CRR will suck out Rs 87,000 crore from the banking system. 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. If the RBI wants to suck out liquidity from the system, it increases the CRR rate.
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