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How RBI’s repo rate hike will impact the economy and your personal finance?


On September 30, the Monetary Policy Committee (MPC) increased interest rates by 50 basis points, as anticipated, to 5.90% while maintaining its FY23 inflation prediction of 6.7 per cent. In August 2022, CPI inflation rose to 7.0% YoY from 6.7% in July. In addition to the US dollar’s ongoing unpredictability, ongoing monetary tightening, increasing inflation, and concerns of a worldwide recession in the financial markets, these factors might have a detrimental effect on emerging market economies and seriously jeopardise economic prospects for development. In order to control persistent inflation, RBI will keep working to maintain financial stability, and it is well known that a hike in key rates results in banks hiking their lending rates, let’s find out how they impact one’s monthly EMI and savings.

Speaking on the impact on the economy, credit demand of banks, and housing demand, Atanuu Agarrwal, Co-founder, Upside AI said “Rising interest rates are designed to slow-down the economy, so a slowdown in general credit demand and housing should be expected. In any case, credit demand has outpaced growth in deposits, so this could help bring the two to parity. Upcoming festive demand may take the edge off slowing growth.”

“Expect to pay higher EMIs on your floating rate loans, which is the case for most mortgages and in time, receive higher interest on your deposits. High inflation and rising deposit rates may lead to relatively lower discretionary spends,” he further added as an impact on our finances.

The expense of education is on the higher side, and soon the interest rates for education loans will rise along with those for other loan types. Following the RBI’s policy repo rate increase, as a result, consequently, the RBI repo rate increase would have a major effect on students. By enquiring about how higher repo rates would affect student loans Mr Ankit Mehra, CEO and Co-founder of GyanDhan said “Interest rate on loans will increase shortly. The increased rates could deter some prospective borrowers, but we don’t expect a significant drop in numbers as the increased education and living costs will result in more borrowing needs. Students with existing loans who might find the increased EMI burden difficult to manage in the light of an almost 2% increase this year should talk to lenders to adjust their loan tenures.”

By enquiring about the consequences for the economy, bank credit demand, and housing demand, Hemang Kapasi, Head of Equity, Sanctum Wealth said “India has always been a ~7-8% interest rate economy and with inflation, at 7% we see limited hikes in future. At this juncture, the scenario in India is such that corporates’ and households’ finances are relatively in far better shape. Corporates are sitting at the lowest leverage in the last 15 years and the highest capacity utilization of 74%+ bodes well for the CAPEX cycle. The household savings rate at 22% is among the highest in the last decade despite which we are seeing good demand for both housings as well as personal spending front. These factors make us believe that these interest rate hikes would not have any significant impact on the overall demand in the economy.”

Because banks borrow money from the central bank when there is a scarcity of funds in order to satisfy their credit demand, customers will now have to pay more when borrowing money from banks as a result of the increase in the repo rate. Mr. HP Singh, Chairman & Managing Director, Satin Creditcare Network Limited said “The Monetary Policy Committee (MPC) of the RBI announced the new repo rate today. The Reserve Bank of India has hiked the repo rate by 50 basis points. This marks the fourth consecutive rise in the repo rate, bringing it to 5.90%. This has affected the lending capacity of all banks within the country. The RBI uses the repo rate to regulate the liquidity and cash flow in the economy. This 50-basis points hike will definitely impact the new and existing borrowers. Many banks have their interest rates linked to the repo rate. This means that with the increased repo rates, various banks would have to raise loan interest rates and EMIs. Home loans are one of the segments that will see a negative effect due to the increase in interest rates.”

He further added that “This will adversely affect people with existing loans, but it might also discourage people from availing of any loans unless absolutely necessary. However, this decision has been made to curb the rising inflation. Restricting the cash flow in the market through this increase in repo rate is of utmost importance to arrest inflation. The supply chain disruption has caused rises in everyday commodities, lowering the purchasing power of people. The credit demand has increased in the market due to the pandemic lockdown, the effects of the Russia-Ukraine war, and inflation. However, with the new hike in the repo rate, the credit supply will be limited. The increasing global inflation rate is a matter of great concern. With India’s inflation rate being 7%, the value of the currency might fall without the intervention of the RBI to try and sustain it and bring it down. The RBI has raised rates by a total of 190 basis points since May 2022. Bringing inflation down is one of the main focuses of the RBI currently in order to sustain the value of the currency and serve economically weak societies.”

Rajiv Shastri, Director and CEO NJ AMC said “The hike is along expected lines, given the pressure on the currency and elevated inflation. There are mixed impulses for inflation with international commodity prices moderating even as manufacturers start to pass on earlier increases as demand remains robust. However, inflation may slow down as such hikes subdue demand, which would create room for the RBI to pause. We believe that we are close to a peak in terms of policy rates and the possibility of further hikes appears to be low.”

Mr. Sandeep Bagla, CEO – TRUST Mutual Funds said “While RBI has hiked rates by 50 bps, the stance still remains at the removal of accommodation. RBI has acknowledged that the policy is still accommodative. Rates would have to hike more to reach a neutral situation. Bond markets had already built in the 50 bps hike and are likely to remain range bound. In the medium term, inflation is likely to keep rates high.”

Disclaimer: The views and recommendations made above are those of individual analysts or personal finance companies, and not of Mint.

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