RBI Hikes Repo Rate - How Will It Impact You?

09 December 2022
6 min read

Latest Increase in Repo Rate: 7th December 2022

For the fourth time in a row, to combat inflation, the Reserve Bank of India's monetary policy panel hiked the key lending rate, also known as the Repo Rate and interest rates by 35 basis points to 6.25%, joining a long line of financial institutes and central banks which have done the same to combat the effects of a surging dollar and rising costs.

The monetary policy committee (MPC) consists of three members from the RBI and three external members, amongst which five of the committee's six members voted in favour of the increase. 

RBI Repo Rate as of 08 December 2022

Repo Rate

6.25%

Reverse Repo Rate

3.35%

Bank Rate

6.50%

Marginal Standing Facility Rate

6.50%

Key Things to Note

Listed below is the Repo Rate increase history of 2022:

  • The RBI raised the Repo Rate by 35 basis points on December 7, 2022, bringing the rate up to 6.25% and marking the fourth hike or Repo Rate increase in 2022.
  • Earlier RBI increased the Repo Rate by 50 basis points to 5.9% on September 30, 2022.
  • In the current fiscal year, the RBI has increased the Repo Rate four times.
  • The central bank had also raised the Repo Rate to 5.4% earlier on August 05, 2022.
  • The Reverse Repo Rate remains at 3.35% after the announcement, while according to the recent RBI Repo Rate news, the new repo rate is now 6.25%.

In this blog, based on RBI latest news, we have mentioned how the increase in the Repo-Rate by the RBI will impact the country's Economic Growth, its influence on Inflation along with its effect on Loans, EMIs, Deposits, Fixed Deposit Rates, Mutual Funds, Savings, and Consumer Spending, etc.

But first, let us quickly look at the RBI Repo Rate History from 2022-2019.

RBI Repo Rate Cut History 2019-2022

Following is a summary of RBI Repo Rate history since February 2019-

Date of Update

Repo Rate

7 December 2022

6.25 %

30 September 2022

5.90%

05 August 2022

5.40%

08 June 2022

4.90%

May 2022

4.40%

09 October 2020

4.00%

06 August 2020

4.00%

22 May 2020

4.00%

27 March 2020

4.40%

06 February 2020

5.15%

07 August 2019

5.40%

06 June 2019

5.75%

04 April 2019

6.00%

07 February 2019

6.25%

Since RBI made a repo rate increase history in 2022, one can say that the year had burnt a hole in the pockets of loan takers. Let’s talk about it in detail and check what happens when the repo rate increases.

Impact of Repo Rate Hike on Various Aspects

Let's now examine how various facets of the Indian economy and othepartsts of Investments are predicted to be impacted when RBI increases repo rate-

  • Impact on Economic Growth

Successive rate raises over a relatively brief period are expected to have an unplanned negative effect on economic growth, even though these measures are essential to tackle inflation.

Due to the rise in the RBI monetary policy repo rate, people may purchase increasingly fewer goods and services, which could potentially affect demand and, in turn, slow growth.

As a result, as everything becomes more expensive, goods and services may no longer be within the means of the underprivileged sections of society.

  • Impact on Inflation

India could experience economic stagnation by the end of the following fiscal year, even though this decision was made exclusively to combat inflation. However, this might only occur if the inflation-growth scenario does not improve.

However, inflation is anticipated to tone down due to these price increases, which would allow the RBI to take a break. Regarding policy rates, it is also thought that the economy is approaching a peak and that the likelihood of further RBI repo rate hikes is low.

  • Impact on Loans & EMIs

As banks raise interest rates, existing borrowers may experience a rise in EMIs even more, which will dampen their enthusiasm about becoming homeowners. The RBI rate hike affects all types of loans, including mortgages, vehicle loans, student loans, personal loans, business loans, credit cards and everything along the same line.

A rate increase of any size affects consumers because it makes borrowing money from commercial banks more expensive. Additionally, a higher cost of borrowing deters the average person from making pointless purchases, which lowers the consumption of goods and services. As a result of which, this enormously influences both the supply and demand chains.

  • Impact on Deposits & Fixed Deposit Rates

A rise in the interest rates on bank deposits is typically a good thing whenever the repo rate rises. Experts claim that consumers who have short and medium-term investments, like fixed deposits and savings, might benefit from higher rates because they will receive higher returns from their investments based on how banking institutions accept the fresh interest rate increase.

The dissemination of the interest rate increase could, however, be a little slower. Additionally, it is anticipated that banks will eventually raise interest rates on deposits.

  • Impact on Mutual Funds

Investors in mutual funds, particularly those who invest in debt mutual funds, should exercise caution in light of the RBI's recent increase in the repo rate. Toughening interest rates can stifle investor confidence in the debt and stock markets.

Rate increases typically have an immediate effect on debt mutual funds, particularly long-duration bond funds. This is because bond prices decline as yield increases, which lowers the return on debt investments.

Due to this, debt investors are compelled to withdraw their funds from the martor to wait for the bond price to increase and increase their profits. Debt funds may therefore experience short to medium-term volatility.

  • Impact on Savings

For such individuals having savings and fixed deposits, higher rates are advantageous. Over the past few years, the RBI has increased rates a few times, including one unexpected increase of 140 basis points that brought the benchmark repo rate to 5.40%.

  • Impact on Consumer Spending  

People are discouraged from making large purchases when borrowing costs rise, which reduces the demand for goods and services. This messes up the supply and demand chains, say experts.

With elevated borrowing costs and limited liquidity, fewer goods and services might be purchased negatively, affecting demands and requirements. Therefore, numerous goods and services might sea price increase and eventually become out of reach for the less fortunate sections of society.

The experts do, nevertheless, contend that as inflation begins to moderate in the medium term, the average person will benefit from increased consumption capacity.

Conclusion

In response to changing macroeconomic factors, RBI continuously modifies the repo rate and the reverse repo rate. Every time the RBI changes the rates, it affects on all economic sectors, although in diverse ways.

The rate increase benefits some market segments while harming others. This article was created to inform readers of this hike's potential changes in various economic sectors; hence, make sure to manage your finances cautiously.

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