RBI Hikes Interest Rates By 0.50%, Now Loans And EMI's Will Be Expensive

The RBI raised the repo rate by 0.50 percent in response to growing inflation. Now from house loans to vehicle and personal would be more expensive, with higher EMIs.
RBI Hikes Interest Rates By 0.50%, Now Loans And EMI's Will Be Expensive
The RBI raised the repo rate by 0.50 percent in response to growing inflation.

The Reserve Bank of India raised the repo rate by 0.50 percent in response to growing inflation. As a result, the repo rate has risen from 4.90 percent to 5.40 percent. That is, everything from house loans to vehicle and personal loans would be more expensive, with higher EMIs.

Following this increase, interest rates have reached the August 2019 level. The Monetary Policy Committee has been meeting since August 3 to deliberate on interest rates. In a news conference on Friday, RBI Governor Shaktikanta Das discussed rising interest rates.

What did the RBI governor say?

· The decision to increase the repo rate by 0.50%

· FY23 real GDP growth forecast remains at 7.2%

· Edible oil prices fall due to increased supply

· Inflation rate likely to be 6.7% in FY23

· The current account deficit is not a cause for concern

· Effect of inflation on the Indian economy

· Global inflation is a matter of concern

· MSF raised from 5.15% to 5.65%

· Focus on withdrawing accommodative stand in MPC meeting

· Inflation is down compared to April

· Urban demand is showing improvement

· Banks' credit growth up 14% annually

· Improvement in rural demand is possible due to better monsoon

How much difference will it make by increasing the rate by 0.50%

Suppose a person named Rohit has taken a house loan of Rs.30 lakh for 20 years at the rate of 7.55%. His loan EMI is Rs 24,260. In 20 years, he will have to pay interest of Rs 28,22,304 at this rate. That is, he will have to pay a total of Rs 58,22,304 instead of 30 lakhs.

One month after taking Rohit's loan, RBI increases the repo rate by 0.50%. For this reason, banks also increase the interest rate by 0.50%. Now when a friend of Rohit comes to the same bank to take a loan, the bank tells him an 8.05% rate of interest instead of 7.55%.

Rohit's friend also takes a loan of Rs 30 lakh only for 20 years, but his EMI comes to Rs 25,187. That is, Rs 927 more than Rohit's EMI. Because of this Rohit's friend will have to pay a total of Rs 60,44,793 in 20 years. This is 2,22,489 more than Rohit's amount.

Will the EMI increase even on the existing loan?

There are two sorts of home loan interest rates: floating and flexible. The interest rate on your loan remains constant from start to finish with a floater. The repo rate has not changed as a result of this. When you choose a variable interest rate, the change in the repo rate also impacts the interest rate on your loan. In such a case, if you have previously taken out a loan with a variable interest rate, your EMI would rise as well.

In four months, there has been a 1.40 percent growth

Every two months, the monetary policy committee meets. The first meeting of this fiscal year took place in April. The repo rate was then held steady at 4% by the RBI. However, on May 2 and 3, the RBI summoned an emergency meeting and raised the repo rate by 0.40 percent to 4.40 percent. The repo rate was changed after May 22, 2020.

The first meeting of the fiscal year was held on April 6-8. Following this, the repo rate was hiked by 0.50 percent during the June 6-8 monetary policy meeting. As a result, the repo rate was raised from 4.40 percent to 4.90 percent. In August, it was hiked by 0.50 percent, bringing it to 5.40 percent.

Why does the RBI raise or lower the repo rate?

In the shape of the repo rate, the RBI has a formidable instrument for combating inflation. When inflation is extremely high, the RBI attempts to limit money flow in the economy by raising the repo rate. If the repo rate rises, the RBI's lending to banks will become more expensive. Banks will charge their consumers more for loans as a result. This will decrease the flow of money in the economy. When money flow is restricted, demand falls and inflation falls.

Similarly, when the economy is in a slump, there is a need to enhance money flow to recover. In such a case, the RBI lowers the repo rate. As a result, RBI loans become more affordable to banks, and clients benefit from lower interest rates. Let us illustrate with an example. There was a drop in demand as economic activity came to a halt during the Corona period. In such a case, the RBI enhanced money flow in the economy by lowering interest rates.

What happens if the reverse repo rate rises or falls?

The reverse repo rate is the interest rate at which the RBI pays banks for keeping money. When the RBI needs to limit market liquidity, it raises the reverse repo rate. Banks benefit from this by getting interest on their deposits with the RBI. When the economy is experiencing significant inflation, the RBI raises the reverse repo rate. This limits the cash available to banks to provide loans to clients.

Do you know what the inflation data show?

1. Retail inflation in India was 7.01 percent in June

According to official figures released earlier this month, retail inflation in India climbed to 7.01 percent in June. In the same period last year, it was 6.26 percent. This was the sixth month in a row that inflation stayed over the central bank's 2 percent -6 percent tolerance limit.

2. Food inflation was 7.75 percent

Food inflation was 7.75 percent in June, down from 7.97 percent in May. In April, it was 8.38 percent. In June, vegetable inflation fell to 17.37 percent from 18.26 percent in May. In June, fuel and light inflation increased to 10.39 percent from 9.54 percent in May.

What effect does inflation have?

Inflation and buying power are inextricably linked. For example, if the inflation rate is 7%, the value of Rs 100 gained will be Rs 93. As a result, one should only invest while keeping inflation in mind. Otherwise, the worth of your money will be diminished.

Expert commentary on the RBI's decision

Despite the decision to raise interest rates, Motilal Oswal Financial Services Ltd MD and CEO Motilal Oswal believe inflation would continue over its comfort zone and has chosen to raise rates for FY-2023. The CPI has maintained its projection of 6.7 percent inflation.

The Reserve Bank of India predicts India's GDP growth to stay around 7.2 percent in the fiscal year 2023. We believe that commodity prices, especially crude oil, have leveled out and that inflation has peaked. We anticipate that the RBI will not take a more aggressive stance in its forthcoming policy meeting based on inflation figures.

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