The Reserve Bank of India, on Tuesday, raised repo rate and cash reserve ratio (CRR), by 50 basis points (100 basis points = 1%), which means another round of interest rate increases for housing loans, car loans, consumer loans and even corporate borrowing for business.
Aimed at reining in an inflation rate that is now at a 13-year high of 11.05%, RBI raised the repo rate to 8.5% from 8% with immediate effect. It also decided to increase CRR from 8.25% to 8.75% in two stages. From July 5, CRR will be set at 8.50%, and from July 19, at 8.75%.
This is the second time in less than two weeks that RBI has raised the repo rate to contain inflation. It’s the rate at which banks borrow from RBI.
A rise in repo rate will make it more expensive for banks to get money from RBI, which is likely to force them to charge customers a higher interest rate. On June 11, RBI had raised repo rate by 25 basis points. Last month, RBI had raised CRR by 50 basis points.
RBI’s rate hike decisions are expected to force banks to raise interest rates as well as deposit rates.
Higher interest rates will affect those who wish to borrow to buy a house, a car, or consumer durables like fridge and television; it will also hurt those who have taken home loans on a floating rate basis. Higher rates also mean corporate houses now have to pay more as interest costs for their borrowings.