The RBI or Reserve Bank of India raised the rate of lending or repo rate to 4.40 per cent on Wednesday. This is the first-rate hike since 2018. The Monetary Policy Committee or the MPC made an unscheduled increase in the lending rate on Wednesday.
RBI raises Repo rate to contain inflation
The RBI took the decision of increasing the rate in order to contain inflation which had remained at 6 per cent since the last three months. However, this increase will only affect those who had borrowed money for home loans and auto loans.
As per reports from Shaktikanta Das, who is the RBI Governor who heads the MPC stated that the banks are required to maintain a cash reserve of 50 bps to 4.5 per cent in order to take out Rs 87,000 crore in liquidity. This will be applicable from 21st May 2022 onwards.
Repurchasing Option or the Repurchasing Agreement denotes the rate of money that a bank can borrow from the Reserve Bank of India. This is one of the important tools used by the Reserve Bank of India keep inflation under control.
Once the Reserve Bank decides to cut the Rate, the cost of borrowing for the commercial banks will be less. Thus, when the rate decreases, the banks will in turn offer lower interest rates against loans. But now as the banks as increased the Rate, this means the interest rates are also likely to increase for loans taken against car, and home as well as for EMI loans.
This new change in the loans will however not affect those who deposits their money in their savings account and through fixed deposits.