RBI raises repo rate by 40 basis points to 4.40% and its impact on the existing and new borrowers

On Wednesday, 4th May 2022, at 2 PM, there was an announcement by Governor Shaktikanta Das that the Reserve Bank of India’s Monetary Policy Community has come to a decision regarding the rising Repo Rate. There will be a hike by 40 basis points to 4.40% due to inflationary pressures. It was surprising, and this hike will come into immediate effect.

The unbiased decision was taken by the Monetary Policy Committee who voted for it after the assessment of the macroeconomic situation of India. Furthermore, many economists suggest that this may indicate the start of the interest rate hike cycle.

The Central Bank held an off-cycle meeting between 2nd and 4th May. The decision about the Repo Rate was made after the 6 members of the Monetary Policy Committee voted unanimously. 

What is the importance of Repo Rate?

It is the interest rate at which commercial banks can take money from the Central Bank. According to the report, after August 2018, this is the first hike in the rate. 

The repercussion will be felt by the corporates and individuals, as it will raise the borrowing cost. Thus, there will be an increasing EMI burden, but FD investors have better hope for returns.


Why did the committed vote for a rise in repo rate?

In March, the retail inflation in India rose to a 17 month high of 6.95%. And, this is above the 6% upper limit laid by the Reserve Bank of India. The inflation will accelerate due to the rise in oil prices, and the core reason is the invasion of Ukraine by Russia. This has led to a hike in food pressure affecting consumer prices.

In March, food prices, which are calculated on a year-on-year basis, rose to 7.68% from 5.85%. The consumer price index has 50% of its contribution from food prices, and inflation is likely to continue to increase.

According to the Monetary Policy, the Central Bank’s primary focus is to maintain inflation within a target. And, along with that, they want to support growth. The Central Bank intends to restrict the return inflation within the range – 2% to 6%.

Its effect on the borrowers – Home Loan and EMI Loan

Mr Shaktikanta Das also said that the potential market is becoming more accurate due to commodity shortage and volatility. There can be another round of price hikes looking at the present situation and the pressure on unprecedented costs.

Further, those planning to borrow money should invest or take the loan right now before the rate starts increasing. It will become a costly affair for those who have already taken a home loan or are under EMI terms. 

However, an assumption can be made that the situation might bring leverage for the home loan market as there is a constant demand and supply chain. But, it is bad news for the existing borrowers, and it will affect personal and car loans as well.


Announcements that ought to affect interest rates

Another announcement was that there would be a hike in the Cash Reserve Ratio by 50 basis points, accounting for 4.5% of the Net Demand and Time Liabilities (NDTL). This will be effective from 21st May 2022. 

Along with that, the Standing Deposit Facility is adjusted to 4.15%. And, the Marginal Standing Facility (MSF) rate and the bank rate are, at present, 4.65%. This would put pressure on the interest rate. After this announcement, the Nifty and the Sensex also fell by very high points.

Who will prove to be beneficial?

There are chances that short term deposit rates and mid-term rates may increase at the beginning, which will be followed by long term interest rates. One must avoid locking the FB for more than one year and look forward to renewing the existing FD. 

So, if you have proper savings, you can invest in real estate and buy a property which will be an asset. This is the right time to look for your dream house with Srijan Realty.