After nearly three-and-half years, the Reserve Bank of India on Wednesday raised key benchmark policy rate by 25 basis points to 5.5 per cent in a bid to tame rising inflation amid continuing West Asia crisis.
With the rate hike, home loans, vehicle loans and corporate loans would become expensive and EMI for existing borrowers would also go up.
A hike in the short-term lending rate (repo) by the RBI marks a reversal from its previous policy action.
The last repo rate hike was in February 2023, when the RBI raised the rate by 0.25 per cent to 6.50 per cent. It kept the rate unchanged through 2023-24 before beginning its rate-cut cycle in 2025.
Announcing the bi-monthly monetary policy, RBI Governor Sanjay Malhotra said the Monetary Policy Committee (MPC) unanimously decided to raise the policy repo rate by 25 basis points.
Meanwhile, retail inflation rose to 4.82 per cent in August as compared to 4.45 per cent in the previous month.MPC changed its stance to 'calibrated tightening' from 'neutral' and also underscored that rate cut is unlikely in the near term given the current conditions.
Besides, MPC must have taken into account the recent actions by central banks of developed nations especially the US Federal Reserve and the European Central Bank.
Last month, the US Fed effected a 25 basis points rate hike to rein in inflation brought on by spiralling oil prices and other factors.
Prior to the Fed, the European Central Bank too raised its key interest rate by 25 basis points.