How RBI repo rate hike will impact your money
3 min read 27 Sep 2022, 01:05 PM ISTRBI rate hike: When the repo rate rises, the borrowing cost for banking institutions rises as well, which is passed on to account holders
PremiumIndia’s central bank Reserve Bank of India (RBI) is set to raise interest rates again. After a small jump in May by 40 basis points, RBI hiked the interest rate by another 50 basis in its bid to fight inflation in August. According to a Reuters poll, there is a wide consensus that the RBI will raise rates at the September 30 meeting. The repo rate is the rate at which the RBI lends short-term funds to banks.
The US Federal Reserve just delivered its third straight 75 basis point hike and has shown no signs of slowing down.
Economic Growth
According to Amit Gupta, MD, SAG Infotech, economic growth will be unintendedly adversely affected by consecutive rate hikes in a short period of time, even though they are necessary to combat inflation.
“People will buy less and less goods and services because of it, which will affect demand. Growth is slowed by this. As a result, goods and services are no longer affordable to poor segments of society. It gets more expensive for everything," said Gupta.
Stagflation
Amit Gupta further said that in a situation of stagnant growth, high unemployment, and persistent inflation, the economists refer to this as stagflation. India could also face stagnation by the end of next fiscal year if the inflation-growth situation does not improve.
Borrowing cost
To put it simply, an increase in repo rates raises the cost of borrowing.
Subhash Goel, MD, Goel Ganga Developments said that following the statement made by the RBI, many banks began raising interest rates on lending and deposit schemes. The RBI's rate hike will also have an impact on the growth of residential sales. Builders throughout the country had also lifted real estate prices in response to the ongoing rise in raw material costs.
“The rise in consumer demand and their capability to afford will continue to be optimistic; snugly interest rates may shake the momentum of sales, with the real estate market recovery continuing at a slow pace," Goel said.
When the repo rate rises, the borrowing cost for banking institutions rises as well, which is passed on to account holders in the form of higher loan and deposit interest rates. When the repo rate rises, the borrowing cost for banking institutions rises as well, which is passed on to account holders in the form of higher loan and deposit interest rates.
“Borrowing money from a bank becomes more expensive as a result, slowing investment and money supply in the market. The real estate sector, which has seen a good pickup in sales due to low financing costs, may be adversely affected by the RBI's rate hike step," said Suren Goyal, Partner, RPS Group.
Loan EMIs
As banks raise interest rates, EMIs for current borrowers will ascend even farther, undermining the optimism of new homebuyers, he added.
“Even a small rate hike has an impact on the consumers as it makes borrowing from the commercial banks expensive. All sorts of loans like Home loan, vehicle loan, education loan, personal loan, business loan, credit cards, mortgages are effected by repo rate hike. Also, an increase in borrowing cost discourages the unnecessary spending’s of common man thereby reducing the demand for goods and services. This further disrupts the demand and supply chain," said Ankit Aggarwal, MD, Devika Group.
Savings, fixed deposit rates
However, increased rates are beneficial for such consumers who have savings and fixed deposits, he further added.
RBI has raised rates in three separate moves since May, one of them unscheduled, totalling 140 basis points and taking the key repo rate to 5.40%.
Meanwhile, the rupee, down nearly 9% this year. A weaker currency is likely to make imports more expensive and keep inflation elevated for longer.
