Interest rates likely to go up

Subject: Economics

Context: Recently, RBI has hiked the Repo rate by 50 basis points, which now stands at 5.90 %.

Concept :

The RBI raised the Repo rate by 50 basis points to 5.90 in the last monetary policy review as the Monetary Policy Committee (MPC) seeks to ensure that inflation remains within the target, while supporting growth.
The regime of high-interest rates is expected to last for two to three years or till when the inflation level comes down and the central bank cuts down the Repo rate.
While the central bank retained its CPI inflation projection at 6.7 per cent for FY23, it downgraded the real GDP growth projections for FY23 to 7 per cent from 7.2 per cent and FY24 at 6.5 per cent.
CPI is likely to remain above 6 per cent for the first three-quarters of FY23.
This indicates that EMIs or tenure on loans can rise further.

Impact on the economy

Impact on demand: The hikes are set to raise the lending rates in the banking system and impact the demand in the economy.
When interest rates are raised, it makes money more expensive, thereby resulting in reduction of demand in the economy and bringing down inflation.
High EMI’s: The rate hike will force banks and non-banking finance companies to increase lending rates and result in higher equated monthly instalments (EMIs) of existing borrowers.
New home, vehicle and personal loans will also become costlier.

Repo Rate

It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
Repo stands for ‘repurchase option’ or ‘repurchase agreement’.
The central bank provides these short term loans against securities such as treasury bills or government bonds.
It is commonly known as Policy Rate too.
Repo rate is used by monetary authorities to control inflation.
The government increases the repo rate when they need to control prices and restrict borrowings.
On the other hand, the repo rate is decreased when there is a need to infuse more money into the market and support economic growth.