RBI increases repo rate by 25 bps to 6.50%

Analyst said that this hike by RBI will not majorly affect non-resident Indians in the UAE, except those who are holding floating mortgage rates back home in India because most of the existing auto and personal loans are obtained at a fixed rates.

While Repo rate is the rate at which the central bank lends money to the banks, the reverse repo rate is the rate at which banks lend money to the RBI. One basis point is equivalent one-hundredth of a percentage. The reverse repo rate has been hiked to 6.25%, the RBI announced after its three-day Monetary Policy Committee (MPC) meeting.

The RBI policy retained the GDP growth projection for 2018-19, as in the June statement, at 7.4 per cent, ranging between 7.5-7.6 per cent in the first half of the fiscal and 7.3-7.4 per cent in the second half of the fiscal.

A high repo rate means that banks borrow funds from the RBI at a higher rate, increasing their cost of funds. The projected inflation rate is above its targeted comfort level of 4 per cent.

While banks are yet to react to the policy, two back-to-back hikes by the RBI may prompt some action given that after the last raise, banks had not passed on the burden to customers.

Among the Monetary Policy Committee panel members, Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R Patel voted in favour of the decision while Dr. Ravindra H Dholakia voted against the decision. Wednesday's repo rate hike was on expected lines, an SBI representative said, adding, "What we will do is to evaluate further".

"The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis", the RBI said.

The central bank maintained its neutral monetary policy stance with the objective of containing inflation at 4 per cent within a band of 2 per cent, while supporting growth. It pegged retail inflation at 4.8 per cent for the second half of the current fiscal.

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