What does this interest rate increase mean?
The Repo rate hike, which comes after a 40 fps walk in may, will force banks and non-bank finance companies to further raise repo-linked lending rates and minimum fees of fund-based lending rates (MCLR). This is because the cost of funds from banks will increase with the increase in the Repo rate. The net result will be a further increase in the assimilated monthly installments (EMIs) of existing borrowers. In addition, new home, car and personal loans will also become more expensive. Analysts also say consumption and demand could be impacted by the Repo’s rate hike.
Will rates continue to rise?
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The central bank is likely to focus on rate hikes in a relatively short tightening cycle in the coming months to curb inflation. As inflation held above 6 percent (the upper end of the tolerance band) and growth continued, the RBI policy panel was widely expected to raise repo rates by 40 bps in June and another 35 bps in August, analysts said. Most importantly, RBI MPC is likely to exit ultra-accommodation in August and push the policy repo rate to pre-pandemic levels of 5.15 percent.
“Accordingly, until then, the RBI MPC is likely to maintain the position of accommodative, while focusing on moving accommodation. Thereafter, as inflation remains elevated, we see the RBI MPC increase the policy repo rate to 5.65 percent in March 2023,” said a Bank of America Securities report.
Impact of RBI Repo Rate Increase by 50 bps
Deposits are rising: Banks will have to raise deposit rates in the coming months. Many banks have already raised deposit rates after the RBI raised the Repo rate by 40bp in May.
Maintain Growth Rate: The RBI’s policy panel has maintained India’s growth forecast of 7.2 percent. The National Statistical Organization forecast on May 31 that India 2021-2022 would be 8.7 percent. Spillovers from ongoing geopolitical tensions, increased commodity prices, ongoing supply bottlenecks and tighter global financial conditions are nevertheless weighing on the outlook, RBI Governor Shaktikanta Das said.
Inflation concern remains: The projections indicate that inflation is likely to remain above the maximum tolerance level of 6 percent in the first three quarters of 2022-23, the MPC said. This signals further rate action on the part of the RBI. Inflation is now projected at 6.7 percent in 2022-23, Das said.
Outlook: According to the MPC, the tense global geopolitical situation and resulting high commodity prices are creating significant uncertainty about the domestic inflation outlook. The recovery in domestic economic activity is gaining momentum. Rural consumption should benefit from the likely normal southwest monsoon and the expected improvement in agricultural prospects, MPC said.