A new trend has taken place in India's policy repo rate. Today, while announcing the second bi-monthly monetary policy, RBI hiked repo rate and reverse repo rate by 25 basis points to 6.25% and 6% from previous 6% and 5.75%. Markets responded to the rate hike very positively, as the benchmark Sensex rose by a whopping 276 points or 0.79% to 35,178.88, whereas Nifty 50 surged by 92 points or 0.86% at 10,684.65. Even Indian rupee welcomed the move, by strengthening to a 1-month high against US benchmark dollar index. The domestic currency finished at 66.840 level up by 0.255 points or 0.38% against the American unit at interbank forex market. 

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This RBI step came as a surprise, because many economists had expected a rise in repo rate ranging from 25 basis points to even 50 basis points, but nobody had foreseen it taking place in this monetary policy. However, RBI had started hinting about a repo rate hike  from last policy, and a three day MPC meeting also raised chances of a rate hike.  nevertheless, the final announcement was nothing short of a big surprise.

Anagha Deodhar, Research Analysts at ICICI Securities said expected 25 bps hike in the upcoming policy as the MPC could have waited for clarity on certain key factors like the extent of MSP hikes and progress of monsoon. 

Meanwhile, analysts at Kotak Institutional Equities had predicted 50 bps of rate hike (August and October) and expected June policy to strongly signal the same.

But looks like RBI did what it felt was right. 

But did you know that, RBI has hiked repo rate by 25 basis point for the first time in over 4 years. A similar hike was made in January 2014 policy taking the repo rate to 8%. That was under the UPA regime. 

Banks are already struggling with higher stressed assets and provisioning which has impacted their credit growth and earnings for quite few fiscals now. 

With the hike in Repo Rate, demand for credit facilities (loan) will decrease, due to higher interest rate.

Higher lending rate will support RBI and government to control inflation. Corporate will be able to get cheaper funds for business expansion. This will help in achieving the growth target. 

Naresh Takkar, MD & Group CEO, ICRA Limited said, "Domestic bond yields have recorded a considerable hardening in the recent months, in line with global trends as well as a decline in the systemic liquidity surplus, and emergence of fiscal and inflationary risks. Moreover, back-ended monetary tightening in 2018 may push up bank lending rates. Accordingly, interest costs are likely to rise in the current fiscal, which would weigh upon margins as well as the strength of the investment recovery in FY2019.