Home / Money / Personal Finance /  How RBI repo rate hike may impact fixed deposit, loan & real estate industries?

As highly anticipated, the Reserve Bank of India raised its key repo rate by 25 basis points (bps) to 6.50% on Wednesday. The Reserve Bank of India (RBI) has increased interest rates six times since May of last year, for a total hike of 250 basis points. From this declaration, it is clear that India will maintain its sustainable growth with price stability on the back of GDP growth projection of 6.4% and an inflation projection of 5.3% for FY 2023-24. However, experts claim that the RBI's move to raise the repo rate will have an effect on the fixed deposit, lending, and real estate sectors. Let's take a closer look at that.

Mr. Jyoti Prakash Gadia- Managing Director at Resurgent India said “While the increase in repo rate by RBI by 25 basis points is on the expected lines, the commercial banks are expected to respond to the same pragmatically by suitably tweaking the deposit and advances rates of interest. Subsequent to the continuous increase in repo rate by RBI since May 2022 the transmission of interest rate change has emerged gradually. However, the increase in interest rates on loans has been much higher than those on deposits resulting in robust profits for banks. With the current increase in repo rate by 25 basis points, we expect the banks to respond positively and procure additional deposits by increasing the deposit rates to attractive levels. The credit growth of banks has been good and they need to attract more deposits. On the credit front as the growth is already visible the increase if any in interest rates needs to be modest. Any substantial increase in lending rates for housing loans will make the loans costlier and EMIs will jump up making these loans unattractive. This may adversely impact the real estate market with a curb on demand when housing loans become unaffordable. The real estate sector at medium level is highly rate sensitive and requisite support is required by keeping the lending rates reasonable."

Archit Gupta, Founder and CEO, Clear said “The Repo Rate is the rate at which the RBI lends short term funds to the other banks. Repo rate is very closely related to the lending rates of the commercial banks. Since the Repo rate is hiked the banks will now have to pay a higher amount of interest to the RBI which in turn shall be collected from the retail/ corporate borrowers of the banks. This would result in higher interest outflow on loans taken from the banks. Thus the loans in general will become costlier by 1-2%."

“The rate of deposit would also get increased by some margin, making the FDs more attractive and providing a source of fixed income. Due to this more people would be inclined to invest in the FDs thereby creating a shortage of free floating money in the market. This would in turn curtail the expenditure done by the retail customers of the banks," he further added. 

CA Manish P. Hingar, Founder at Fintoo said “The RBI announced a 25 basis points increase in the repo rate to 6.5% today, with the decision made by a 4 out of 6 majority on the Monetary Policy Committee (MPC). Despite volatile global developments, the Indian economy remains robust. The rate hike, which was in line with market expectations, surprised some who felt there was a possibility of a rate pause given the recent softening of inflation in India. However, the RBI was more concerned about high and persistent core inflation and the impact of rate hikes by other major central banks on the foreign exchange market. Barring any unexpected rise in inflation, the RBI is expected to maintain its current policy rate for the rest of 2023, which would benefit both the debt and equity markets. The peak of the rate cycle is believed to be near, and the central bank is expected to start easing rates in the next calendar year, as long as inflation remains under control. The 25 basis points hike is seen as a measure to protect the rupee from further depreciation, control import-driven inflation, and promote sustainable growth at a rate of 6.5% or higher. As a result of this announcement, home loans are expected to become more expensive."

Mr. Marzban Irani, CIO- Debt, LIC Mutual Fund said “Generally, with the rise in repo rates, banks tend to increase FD rates and Loan rates. However, it depends on the liquidity situation and capital requirement of individual banks as in the last few months, the FD rates have already gone up. In current scenario, given our view that yields may have peaked, any meaningful rise in FD/loan rates seems unlikely."

Ram Shri Ram, Mahagram's CEO stated that the Reserve Bank of India increased the repo rate by 25 basis points. This decision is likely to have a profound impact on the Indian monetary system. Particularly in terms of fixed deposits, loans, and then the real estate sector. With this hike, it is pertinent to say that the impact on the repo rate will surely have an impact on the (NBFCs) non-banking financial companies and this will eventually trickle down toward consumers because banks are now likely to raise their interest rates on fixed deposits and loans. Most imperatively, the central bank should bring financial stability to lending companies. Also, fintech companies that offer retail banking services are presumably to endure due to decreasing demand for their services. On the other hand, it also has to be considered that it will widely affect businesses as this is the sixth hike in the repo rate. The inflation is likely to stay at 4% and the Governor is expecting it to average 5.6% by the fourth quarter of 2023-24. The governor is confident about the GDP growth, it is projected to be at 6.4% in the financial year 2024. However, Since fintech companies are heavily dependent on low-interest rates, this rise in repo rate could have long term effect on their business operations and profitablity. He emphasized that the Indian economy is resilient even though the global environment is challenging.

Binitha Dalal, Founder & Managing Partner, Mt K Kapital said “We are now 0.25% higher than the pre pandemic repo rate of 2019 and we hope this is the end of the rate increase cycle. While the interest rates have gone up by 2-3% in comparison the GDP and strength of the Indian economy is much better than the pre pandemic levels at 6.9%. The avg emi has gone up by 7000/- for a loan of 50lacs in the last 2 years however the earnings per capita has gone up by 18.3% thus showing strength in absorbing the rate hike. Real estate as a sector has continued to do well with promising sales numbers through the year and now that we are reaching the peak of interest rates we expect home sales to grow further. While we understand where the Governor is coming from towards this rate hike, we urge him to put a pause on it so as to continue the growth trend for our economy."

Jyoti Bhandari, Founder and CEO, Lovak Capital said “As we know, any increase in the repo rate, as recently announced by the RBI, usually leads to higher borrowing costs for banks. Result: increase in interest rates on loans by banks which in turn will make them more expensive for borrowers, in turn impacting demand for loans and slowing down economic activity. On the other hand, an increase in the repo rate may see interest rates on fixed deposits increasing thereby making it an attractive savings option resulting in a shift of funds from loans to fixed deposits. The impact on the real estate sector is not a simple one to visualise. This is because higher borrowing costs could reduce demand for home loans and slow down the real estate market, but higher returns on fixed deposits could encourage investment in property. The other possible impact outcomes on the real estate sector can be lower affordability as higher interest rates will increase cost of ownership, making it less affordable for prospective buyers. Result: muted demand and prices in this space. Another fallout of the interest rate increase will be delays in projects thereby reducing the quantum of new real estate projects launched. Hence, while the impact on loans and fixed deposits is a relatively straight one, its impact on the real estate will be a mixed one. As per RBI, inflation is moderating but still it has decided to raise repo rate by 25 bps because it wants to align its policy with that of US counterpart as global economy is still resilient, contrary to fears that recession in US is in offing."

Mr Amrutesh Reddy, Managing Director, NDR Warehousing said “The surge in commodity prices has already posed a challenge for the logistics sector, despite the RBI's 25 bps rate increase being in line with industry expectations. The capex outlay will now decrease due to the hike, making it difficult for industry players to maintain their infrastructure projects. Although the RBI has made a commendable attempt to control inflation and the rupee, the expansion of the infrastructure and logistics sectors may be hampered. In order to promote the contributions made by the players to the Indian economy, we anticipate that concessions for infrastructure projects will become even easier in the future."

Mr. Sandeep Bagla, CEO, TRUST Mutual Fund said “A 25 bp hike in repo rate by RBI was baked in bond yields. 2 out of 6 MPC members voted for no rate hike. Market is a tad disappointed as there was no change in stance from “withdrawal of accommodation" to neutral. CPI Inflation is projected for FY24 at 5.3%. Market forecasters are expecting inflation to trend lower from RBI projections. The policy remains focussed on fighting inflation and should be welcomed by markets."

Ms. Shalini Tibrewala, Senior Fund Manager (Fixed Income), JM Financial Asset Management Limited said “The Reserve Bank of India hiked its key repo rate by 25 basis points as expected but surprised markets by leaving the door open to more tightening, saying core inflation remained high. The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent though still remains well-above target in major economies. The situation remains fluid and uncertain," RBI Governor Shaktikanta Das said while announcing the Monetary Policy Committee’s rate decision. The RBI hiked repo rate for the sixth consecutive time in the current financial year by 25 bps to 6.50% mainly to curtail inflationary expectations. RBI remains focused on its stance of withdrawal of accommodation to ensure inflation remains within target going forward, while supporting growth. RBI has maintained the growth forecast at 7% (6.8% previously) and inflation forecast at 6.50% (6.7% previously) for FY 22-23 respectively. For FY 23-24 growth is projected at 6.40% and CPI inflation at 5.30% with risks evenly balanced on either side."

Amit Shankar, Vice President- Credit, Vivriti Capital said “RBI’s prudent approach to long term discipline has been well established amongst global economies. Continuing with the same theme, 25 basis points hike in repo rate has been targeted to control inflation rather than provide short term relief to slowdown concerns. We expect the inflation to stay within permissible limits given RBI's continued cautious outlook. While in near term this may lead to slower credit growth in general, there are ample opportunities of credit discovery and solid mid-market companies requiring growth capital that could provide impetus to the underwriting activity. We expect RBI to switch to a dovish stance if inflation moderates and economic activities pick up."

Rajesh Shet, Co-Founder & CEO SahiBandhu said “The hike in repo rate by 25 bps may have a sizeable impact on the loan sector as the interest rates are likely to go up for personal loan, home loan etc. However, for Gold Loan customers, interest rate is not the only selection criteria. Other factors such as LTV [Loan To Value], Loan tenure, urgent requirement of funds etc. are also considered while availing Gold Loan. For a low-ticket loan, the change in interest rate may not have a significant impact on the interest outgo. Infact, if more people are made aware of this reasonable credit source, then they could make the most of this information and consider gold loan as their preferred mode over conventional loans to meet their financial needs. Gold loans are already a popular source of funding for people with limited access to other forms of credit, and the increased cost of borrowing through traditional loans could further drive up the demand for gold loans."

Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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