Repo Rate: Reserve Bank Governor Sanjay Malhotra has once again ruled out a reduction in the repo rate. Following indications from Finance Minister Nirmala Sitharaman, there was an expectation that a cut in the repo rate would be announced after the RBI’s MPC meeting on Wednesday; however, in light of the risks arising from the Iran crisis, no changes have been made for the time being.
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Repo Rate: A decision regarding the repo rate was announced on Wednesday, following a three-day meeting of the Monetary Policy Committee (MPC) led by Reserve Bank Governor Sanjay Malhotra. The Governor has decided, for the fourth consecutive time, not to lower the repo rate. The Governor stated that the repo rate has been maintained at 5.25 percent. Due to the crisis in Iran, inflation is once again posing a risk. In such a scenario, prioritizing support for economic measures and sustaining the growth rate is deemed more critical than reducing interest rates.
The repo rate serves as the external benchmark against which all other banks determine the interest rates for their retail loans. Finance Minister Nirmala Sitharaman had previously indicated that the RBI still had room to cut the repo rate once again. However, following Governor Malhotra’s announcement, millions of borrowers and prospective homebuyers across the country have been left disappointed. As there has been no change in the repo rate, the EMIs on your home and auto loans will remain unchanged as well.
Inflation Ties the RBI’s Hands
In his address following the MPC meeting, the Governor stated that the escalating crisis in West Asia—driven by the ongoing conflict—has emerged as a grave concern for the entire world. This situation is impacting India in various ways, and the risk of inflation appears to be on the rise once again. Under these circumstances, safeguarding the economy and sustaining growth have become paramount priorities. If crude oil prices remain elevated in the near future, retail inflation could also witness an uptick. This is precisely why the majority of the MPC members did not endorse a reduction in the repo rate at this juncture.
Impact on Loans
The government and banks have linked the interest rates on most of their loans to external benchmarks, such as the Repo Rate. Consequently, whenever the Repo Rate is reduced, it has a direct impact on the interest rates for retail loans. A reduction in the Repo Rate leads to lower loan EMIs; however, since the Repo Rate was not cut this time, EMIs will remain unchanged. This impact will also be felt by customers holding home and auto loans.
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