How RBI Rising Repo Rate May Affect You


Like the US Fed, India’s central bank also came as no surprise this time around, as it hiked the repo rate by 50 basis points last Friday. The repo rate – at which the RBI lends money to commercial banks – now stands at 5.40%. And with this rise, the repo rate is now slightly above the pre-Covid level of 5.15%.

The central bank had cut the repo rate during the pandemic to help support the struggling economy. While the Standing Deposit Facility, or SDF, rate is now 5.15%, while the Marginal Standing Facility, or MSF, rate is 5.65%.



For RBI, inflation remains a concern. CPI inflation remained above the upper band of its mandatory range of 2-6% for six straight months through June. Inflation for June was 7.01%. The RBI maintained its CPI inflation forecast of 6.7% for FY23. CPI inflation is estimated at 7.1% in July-September, 6.4% in October- December and 5.8% in January-March. This forecast indicates the likelihood that the RBI MPC will not fulfill its mandate of ensuring that average inflation does not remain above the target range for more than three consecutive quarters. In the event of such a failure, the RBI must provide an explanation to the government.

Now let’s see how RBI’s decision will affect us. This could prove costly for new borrowers and those who already have long-term retail loans linked to the repo rate. Jitendra Solanki, a tax and investment expert registered with SEBI, told a financial daily that banks needed to raise interest rates on loans to individuals, such as personal, home and car loans. So the EMIs on your home, auto or bike loans should go up. Experts say a rise in interest rates on long-term retail loans will also increase EMIs for at least some existing borrowers if their loan is pegged to the repo rate, particularly in the case of home and auto loans. .

India Sotheby’s International Realty CEO Amit Goyal said home loan rates are expected to be around 8% per annum. Borrowers of existing home loans are considering either a longer tenure or a higher EMI. The bank’s default option is to increase the hold time so that the EMIs do not change. However, the borrower will not only bear the brunt of increased tenure, but also the burden of additional interest expense. Thus, there could be a short-term dent in demand from the medium and affordable housing segment.


[Byte of BankBazaar.com CEO Adhil Shetty on home loans]

Now for some good news. The three consecutive rate hikes signify further impetus for rising interest rates on fixed deposits. Note that 8% interest on FDs is an important benchmark as returns above this level are considered decent. FD rates hitting 8% will depend on how long the rate hike cycle lasts. According to experts quoted by a financial daily, there is still room for a rise of 50 to 100 basis points over the next 3 to 4 quarters.

Given the momentum of RBI rate hikes, it might be reasonable to expect FD interest rates to approach 8% within the next year or two. Now may not be the right time to book a long-term FD. In the current growth rate scenario, you need to reserve a FD with a short duration. So, going for FDs with a tenure of 6 months to a year might turn out to be a better bet. And, when these FDs mature and allow you to get a better rate at renewal time, you can upgrade to longer-term FDs.

Deepesh Raghaw, registered investment adviser, says that even if exchange rates go up, the transition will be slow and won’t happen overnight. Whether there will be a move to FDs from the markets will depend on market commentary and volatility

And what about the impact on India Inc’s investment cycle?

According to Madan Sabnavis, chief economist at the Bank of Baroda, investments by large companies will not be affected. The dynamism of demand will encourage investment in the steel and cement industry. SME investments will be impacted

All eyes therefore remain on inflation, with the continuation of the Russian-Ukrainian war and the threat of new geopolitical tensions in Asia.

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