Monetary policy: If RBI hikes repo rate by 25 bps, how does it impact your EMIs

Majority of experts have reckoned a 25 bps rate hike in the last bi-monthly monetary policy of FY23 which RBI will present on Wednesday. This would be the lowest hike in the repo rate for the current fiscal. If a 25 bps is in offing, then deposits and lending rates are likely to go up as well. In a rate hike scenario, the borrowing cost gets higher and banks pass on the impact to borrowers, hence EMIs get costlier. While a rate hike comes as good news for earning attractive rates on fixed deposits.

After 50 basis points hike three times in a row, RBI softened in December policy and increased the repo rate by 35 basis points to 6.25%. Hence, so far in FY23, the repo rate has been increased by 225 basis points. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.

However, MPC remained focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

RBI began the rate hike cycle in FY23 to tame inflationary pressures. Currently, inflation has eased for a second consecutive month in December 2022 at 5.72%. This would also be the second month in a row where inflation is below RBI's upper tolerance limit.

In January 2023 bulletin, RBI said, lending and deposit rates of SCBs have continued to move higher since May 2022 in response to the 225 bps increase in the policy repo rate.

As per RBI data, from May to December 2022, the external benchmark-based lending rate and the 1-year median marginal cost of funds-based lending rate (MCLR) increased by 225 bps and 107 bps, respectively. Overall, the weighted average lending rate (WALR) on fresh and outstanding rupee loans rose by 135 bps and 71 bps, respectively, from May to November 2022. On the deposit side, the median term deposit rate (card rates) on fresh retail deposits increased by 75 bps from May to December 2022.

In regards to EMIs, how will another rate hike impact borrowers?

In the February 2023 policy, Vivek Rathi- Director of Research, Knight Frank India expects the RBI to hike the repo rate moderately by 20 to 25 bps as inflation has softened to below 6% in the last two months.

Rathi added, "With inflation coming under control and reduced pace of US Fed rate hike, the focus of the RBI is now likely to shift towards maintaining growth, which can moderate in the coming financial year owing to global uncertainties. Thus, moderation in the pace of repo rate hike is pertinent to keep domestic demand afloat to support the economy."

As per Knight Frank's expert, so far, the cumulative repo rate hike stands at 225 bps, and the lending rate as measured by the MCLR rate is up 140 bps; accounting for about 60% of the repo rate hike transmission into the lending rate. Thus, borrowing costs have increased across product categories including home loans.

Also, the Knight Frank Affordability index of the home buyers has worsened marginally by an average of 1.4% in this rate cycle and hence remains supportive of demand. Although consumers’ inclination toward home purchases has remained resilient in the last few months, there have also been some signs of moderation in sequential growth in home sales as hinted by the early indicators.

Thus, Rathi hopes that moderation in policy rate hike intensity will lift homebuyer and industry sentiment and help maintain the housing sales trajectory in the country.

Meanwhile, Ravi Subramanian, MD & CEO of Shriram Housing Finance said, the MPC is likely to maintain its stance of “withdrawal of accommodation” and ease the pace of rate increases by RBI hiking rates by 25bps in Feb. Retail inflation is within the upper tolerance band of 6 percent and food inflation has eased off. Housing credit growth has been leading retail credit growth, rising by over 15%. As the market sentiment in the real estate sector in non-metro markets remains strong, demand is likely to offset the rate increase impact."

Further, Rachit Chawla, CEO of Finway FSC explains that it is not certain that the Reserve Bank of India (RBI) will increase the lending rate by 25 basis points. Most importantly, if the inflation is still not easing, and everything is getting expensive, the central bank will have to bring in hikes on the repo rates to maintain financial stability. It is a hands-down fact that with the hike in the repo rates, the non-banking financial companies (NBFCs) will also have to increase their subsequent lending rate and the burden will be on the consumers. It will be challenging to grow the loan book for NBFCs if the lending rate has increased any further, but I think that is a bold measure that the RBI needs to take in terms of controlling inflation.

Mahesh Shukla CEO & Founder PayMe believes the hike in the lending rates by RBI will certainly have an impact on the non-banking financial companies (NBFCs) and Fintechs, and might eventually have an impact on the customers, but it should also be noted these are short-term disruptions to ward off bigger financial crises.

Lastly, Shukla overall, said, "While the downside of the global economy still continues, the domestic economy is showing an uptick and resilience, mostly because of the strict moves of repo rate hikes taken by the apex financial regulatory body. The RBI is now expected to ease the hike in the repo rate by 25 basis points, viewing gradual financial stability and maintaining a prolonged wait-and-watch approach."

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