RBI raises repo rate by 25 bps to 5.50%, first hike in four years; home, car loan EMIs may rise

The Reserve Bank of India (RBI) has delivered a blow to borrowers by raising the repo rate by 25 basis points. Governor Sanjay Malhotra announced the decision after a three-day meeting of the Monetary Policy Committee. The repo rate now stands at 5.50 per cent, up from 5.25 per cent. This is the first time in four years that the repo rate has been raised.

The immediate implication is that interest rates on home loans, car loans and other borrowings are likely to rise in the coming days. On floating-rate loans in particular, if banks raise their rates, the monthly instalment (EMI) may go up or the repayment period may be extended.

The repo rate is the interest rate at which the RBI lends money to banks for short periods. When banks are short of funds, they borrow from the RBI against government securities. A higher repo rate makes it costlier for banks to raise money. Banks may then pass part of the burden on to customers by raising lending rates.

The Governor cited the state of the global economy behind the decision. The ongoing conflict in West Asia, rising crude oil prices and the threat of inflation worldwide could pose an inflation challenge for the Indian economy as well.

Along with the repo rate, the RBI has set the SDF rate at 5.25 per cent and the MSF rate at 5.75 per cent. The stance of monetary policy has also been changed. It was earlier neutral and is now calibrated tightening.

The RBI has also raised its inflation projections. For FY27, the core inflation forecast has been raised from 4.3 per cent to 4.4 per cent, and the CPI inflation forecast from 5 per cent to 5.2 per cent.

On the other hand, the RBI's outlook on economic growth is positive. The real GDP growth forecast for FY27 has been raised from 6.7 per cent to 7.1 per cent. The RBI's main challenge will be to keep inflation in check while sustaining the pace of growth.