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On a Monetary Policy Committee (MPC), conducted on Thursday i.e 8th June 2022, RBI has increased the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 percent with immediate effect. The policy repo rate is the rate at which the commercial banks borrow money from the Central bank i.e RBI.
All members of the MPC - Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das - unanimously voted to increase the policy repo rate by 50 basis points to 4.90 percent.
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This decision was taken after conducting an assessment of the current and evolving macroeconomic situation and which is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, i.e restricting the inflation rate to a maximum of 6%.
Some of the points considered during the assessment that led to the increase in the policy repo rate by 50 bps were:
- In Q4 of the F.Y 2021-22, real GDP growth decelerated to 4.1% from 5.4% in Q3, dragged down mainly by weakness in private consumption on the back of the Omicron wave.
- Money supply (M3) and bank credit from commercial banks rose (y-o-y) by 8.8 percent and 12.1 percent, respectively, as of May 20, 2022, and the liquidity by which financial institutions can raise money or cash was large
- CPI inflation rose from 7.0% in March 2022 to 7.8% in April 2022, reflecting a broad-based increase in all its major constituents. Fuel inflation was driven up by a rise in LPG and kerosene prices.
Evidently, the repo rate increase will inadvertently affect the common populous, as loan interests would also jump up, making your average EMI a bit more costly.
But in the long run, an increase in rate will be crucial to curb the rising inflation.
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-by Gautam
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