Opinion
RBI monetary policy: Your home-loan EMIs won’t increase
Summary
- Retail borrowers have been under tremendous pressure lately, with home-loan interest rates rising from 6.5% to 7% in April 2022 to around 9% to 9.5% now
In its latest monetary policy announcement, the Reserve Bank of India (RBI) decided to keep the repo rate — the rate at which it lends to commercial banks — unchanged at 6.5%. This move was expected, with most economists polled before the policy forecasting this. What does it mean? Mint decodes the development.
Why did the RBI maintain the repo rate?
One way that central banks try to control inflation — the rate at which prices rise — is by increasing interest rates. The expectation is that when interest rates are high, consumers and businesses will borrow and spend less, leading to less money chasing goods and services. This dynamic, it is hoped, will slow down the rate of price increases. India has been battling retail inflation of more than 6% for a while now. In April 2022 retail inflation was at 7.8%. In January it was at 6.5%. By April, it had fallen to 4.7%, causing the central bank to keep the repo rate unchanged.
Why has inflation fallen over the past few months?
Food items comprise nearly two-fifths of the basket of items used to measure retail inflation. In April 2022 food inflation was 8.3%. By April this year, it had fallen to 3.8%. Within food, vegetable prices had risen 15.3% in April 2022. They contracted 6.5% in April this year. Further, the price of fuel and light items had risen 10.7% in April 2022. This April, their prices rose by a much lower 5.5%. Food, fuel and light items comprise close to 46% of the retail-inflation basket. A moderation in their prices has resulted in lower retail inflation.
How big a role does the RBI play in controlling inflation?
With fuel, light and food items constituting nearly half the basket, RBI’s ability to control retail inflation is limited. By raising rates it hopes to control borrowing by individuals and businesses. In early October, non-food lending by banks had seen an annual growth of 17.2%. By 19 May this had fallen to 15.6%, suggesting that the RBI raising rates has limited impact on lending and, by extension, controlling inflation.
How inflationary does the future look?
Subject to a normal monsoon, the RBI has forecast retail inflation of 5.1% in 2023-24. Further, cereal inflation has been high. The price of wheat that’s not distributed through the public distribution system (PDS) rose by 15.5% in April, having risen 25% in January. The RBI expects wheat prices to correct “on robust mandi arrivals". Further, the price of non-PDS rice has been rising by more than 10%. Milk prices have been on fire, rising 8.9% in April. The RBI expects milk prices to remain high “due to supply shortfalls and high fodder costs".
What does this mean for retail borrowers?
Retail borrowers have been under tremendous pressure lately, with home-loan interest rates rising from 6.5% to 7% in April 2022 to around 9% to 9.5% now. This has pushed up EMIs. With the RBI keeping the repo rate constant, people’s EMIs won’t increase any further. Also, with inflation expected to fall further, the RBI is expected to cut the repo rate some time later this year. Banks will pass on this cut to home-loan customers, though they may take time to do so.
