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Repo Rate Hike: How RBI’s monetary policy impacts loan, bank FDs

It is reported that the decision to increase the repo rate was taken unanimously by the committee, headed by RBI Governor Shaktikanta Das.

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New Delhi: The Reserve Bank of India on Friday announced a hike in repo rate by 50 bps to 5.4 per cent. Notably, this is third the time in a row that RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) increased the rate. With the new hike, the short-term lending rate crossed the pre-pandemic level of 5.15 per cent.

It is reported that the decision to increase the rate was taken unanimously by the committee, headed by RBI Governor Shaktikanta Das.

What is the repo rate?

The Repo rate is the rate at which the RBI gives loans to commercial banks. As the Central Bank has increased the lending rate, the commercial banks have to spend more to borrow cash to get loans.

How does a hike in the repo rate help to reduce inflation?

The hike in the repo rate helps the RBI to reduce the supply of money in the economy as it helps to control inflation. Market experts suggest less money in circulation reduces the spending in the market, causing prices to cool.

Good news for depositors and bad news for borrowers

Due to the hike in repo rate, banks pass on the RBI’s repo rate hike to the loan seeker for buying a car, bike, or apartment. It means the more interest RBI charges from commercial banks the more people have to pay the bank on their loan amount to the banks.

It is expected that the banks will raise the interest rate on bank deposits like bank FD and other term deposits. This will invite people to opt for fixed deposits, helping the RBI to reduce more money from circulation.

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