RBI Repo Rate 2022 Hike For the Fourth Consecutive Time

October 01, 2022

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The Reserve Bank of India (RBI) increased the Repo Rate by 50 basis points, making it clock at 5.90%. In the previous five months, interest rates rose by 190 basis points, making this the fourth consecutive increase in the Repo Rate 2022.

The Central Bank lifted rates on May 4, 2022, after keeping key lending rates at the same level for nearly two years, after cutting the repo rate in March 2020 to combat Covid-induced economic crisis. Inflation measured by the Consumer Price Index, which the Central Bank takes into account to determine its benchmark rate, was recorded at 7% in August.

The latest move of the Reserve Bank of India comes after the US Federal Reserve raised rates for the third time in a row by 0.75% points.

As a result, the benchmark clocked at 3.25 to 3.5%.

Aftereffects of the Fourth Consecutive Repo Rate Hike 2022

Home loan borrowers are likely to encounter hard times ahead of them. As the Reserve Bank of India (RBI) upped the repo rate 2022 once more, borrowers’ home loan interest rates may climb soon. The repo rate has increased by 50 basis points at the Central Bank.

The pinch of increase in the past RBI monetary policy Repo Rate announcements since May 2022 was already being felt by many home loan borrowers. In light of the current high inflation, another policy rate increase will only worsen their problems.

Numerous banks’ home loan interest rates reflect the RBI’s policy increase since May 2022. Depending on the sort of benchmark that the lender has chosen, there has been a proportional increase in house loan interest rates even though the RBI boosted the repo rate by 140 points from May.

What is Repo Rate?

The Repo Rate (RR) is the interest rate at which the Reserve Bank of India, the nation’s central bank, loans money to commercial banks or other financial institutions in place of securities to preserve liquidity when there is a lack of funds or due to regulatory requirements. It appears to be the RBI’s important initiative to control inflation. Any changes to the repo rate impact money movement in the market. The repo rate as of today is 5.40% per annum.

RBI Repo Rate 2022 September

The table below shows the RBI Repo Rate for September 2022. 

Specification Rate
RBI Repo Rate 5.40%
Current Bank Rate 5.15%
Current Reverse Repo Rate 3.35%
Marginal Standing Facility Rate 5.15%

Importance of RBI Repo Rate

The following are some of the elements of the Repo Rate transaction among both banks and the RBI:

  • Following a written contract; the RBI lends money to commercial banks in exchange for securities and bonds as security. The RBI uses leverage against the securities the banks offer to lend money.
  • Short-term borrowings are loans or transactions with a repo rate. While the RBI possesses the securities, banks obtain term funds from the RBI.
  • Banks can repurchase securities at a specified price and date. The loan amount is this predetermined price, and the interest is derived using the repo rate.
  • If banks go into default or don’t pay back the money on time, RBI is allowed to sell the securities.
  • Banks take out loans to cover a shortfall in cash reserves or to keep the required minimum reserve balance.
  • The RBI reviews the RR regularly and decides whether to increase, decrease, or maintain it. Decisions made by the RBI’s monetary policy committee may affect inflation and liquidity in the national economy.
  • The RBI uses the RR as a key instrument to manage national inflation trends. Commercial banks’ borrowing becomes more or less expensive due to changing interest rates.
  • The link between the Repo Rate and inflation is the opposite. When the Repo Rate is raised, inflation is reduced, and when it is lowered, inflation is enhanced.

RBI Repo Rate Cut History From 2005 to 2022

The following table decodes the RBI repo rate change in India from October 2005 to September 2022.

Effective Date RBI Repo Rate Repo Rate Percentage  Change
5th August, 2022 5.40% 0.5%
8th June, 2022 4.90% 0.5%
May, 2022 4.40% 0.4%
9th October, 2020 4.00% 0.00%
6th August, 2020 4.00% 0.00%
22nd May, 2020 4.00% 0.40%
27th March, 2020 4.40% 0.75%
6th February, 2020 5.15% 0.25%
7th August, 2019 5.40% 0.35%
6th June, 2019 5.75% 0.25%
4th April, 2019 6.00% 0.25%
7th February, 2019 6.25% 0.25%
1st August, 2018 6.50% 0.25%
6th June, 2018 6.25% 0.25%
2nd August, 2017 6.00% 0.25%
4th October, 2016 6.25% 0.25%
5th April, 2016 6.50% 0.25%
29th September, 2015 6.75% 0.50%
2nd June, 2015 7.25% 0.25%
4th March, 2015 7.50% 0.25%
15th January, 2015 7.75% 0.25%
28th January, 2014 8.00% -0.25%
29th October, 2013 7.75% -0.25%
20th September,  2013 7.50% -0.25%
3rd May, 2013 7.25% -0.50%
17th March, 2011 6.75% -0.25%
25th January, 2011 6.50% -0.25%
2nd November, 2010 6.25% -0.25%
16th September, 2010 6.00% -0.25%
27th July, 2010 5.75% -0.25%
2nd July, 2010 5.50% -0.25%
20th April, 2010 5.25% -0.25%
19th March, 2010 5.00% -0.25%
21st April, 2009 4.75% 0.25%
5 March, 2009 5.00% 0.50%
5th January, 2009 5.50% 1.00%
8th December, 2008 6.50% 1.00%
3rd November, 2008 7.50% 0.50%
20th October, 2008 8.00% 1.00%
30th July, 2008 9.00% -0.50%
25th June, 2008 8.50% -0.50%
12th June, 2008 8.00% -0.25%
30th March, 2007 7.75% -0.25%
31st January, 2007 7.50% -0.25%
30th October, 2006 7.25% -0.25%
25th July, 2006 7.00% -0.50%
24th January, 2006 6.50% -0.25%
26th October, 2005 6.25% 00.00

When Does RBI Change Repo Rate?

The Reserve Bank of India doesn’t change the Repo Rate at any movement. Several factors drive repo rate change, including high inflation. During inflation, the utmost priority is to bring down the flow of money within the economy, and the foremost way to do so is by escalating the repo rate. The repo rate hike makes borrowing capacity costly for businesses and industries. Further, it halts the investment and supply of money across the market. 

What Happens When the Repo Rate Changes? 

Even a minute change in the basis points, i.e. BSP in Repo Rate, creates a huge impact. The higher impact can be witnessed in the availability of credit, inflation, liquidity, and economic activities across the country. The slightest change in the nation’s financial ecosystem can either flourish the economy or make it suffer. During inflation, the RBI has to push down the nation’s economy to bring the much-needed stabilisation.

RBI Repo Rate hike or reduction can create the following impact:

Impact of Repo Rate on Inflation and Economy

When the RBI Repo Rate rises, banks and financial institutions become hesitant to borrow funds from the Reserve Bank of India to avoid paying higher interest rates. In such circumstances, banks safeguard themselves by restricting overspending cash reserves and minimising loan grants.

Repo rate hike halts the flow of money along with several economic activities. However, this helps in the prevention of inflation. When the Central Bank of India slashes the rate, banks get the opportunity to borrow and spend more together with more investment. Escalated cash flow further results in the economic boom and rapid business cycles.

Impact of Repo Rate on Bank Loan Rates

When the RBI Repo Rate is high, banking institutions become bound to clear off their debts at higher interest amounts. To compensate for the same, banks charge higher interest rates to borrowers. In other words, RBI tries to discourage banks from borrowing money, and so does the bank from the borrowers.

This entire procedure drains the liquidity from the financial market, which somehow helps control the inflation rate. On the other hand, when the Repo Rate decreases, banks also reduce their interest rate to attract more borrowers. Such a scenario escalates home loan demands along with other loans.

During this time, individuals find financial instruments more alluring as they get the opportunity to secure them at lower interest rates. However, the banks also profit from the same. The enhanced flow of funds results in an economic boom.

Impact of Repo Rate on Bank Deposit Rates: 

People count on loans to meet their financial obligations but to furnish their long-term goals; people count on deposits. Any change in RBI Repo Rate also impacts the interest rates you get on fixed deposits and savings accounts. Repo Rate is the benchmark rate that all banking institutions provide financial instruments. 

Repo Rate vs Reverse Repo Rate

One of the most crucial concepts we must comprehend is the difference between repo rate and reverse repo rate. The distinctions include:

  • The RBI charges a repo rate on the money it lends to commercial banks and other financial institutions. The interest rate that the central bank offers to commercial banks that deposit money in the RBI treasury is known as the reverse repo rate, on the other hand.
  • The current reverse repo rate is never more than the current repo rate.
  • Repo rates assist in reducing market inflation. On the other side, the reverse repo rate aids in regulating the amount of money available in the market.
A quick and constant learner, Akhil can bring off any niche in demand with his expertise in simplifying complex. He believes in focusing on what's missing rather than adoring what's in his bag. When he is not busy typing away, he likes to watch his favourite football team, Arsenal! Being a lifelong Michael Jordan fan, he hopes to achieve the dream of meeting his idol one day. Currently, he is a master of finances with Urban Money.

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