RBI hikes repo rate by 50 basis points to 4.9%, EMIs to rise

Mumbai: The equated monthly instalments (EMI) on your home, car loans are all set to go up as the Monetary Policy Committee (MPC) aka the rate setting panel of the Reserve Bank of India on Wednesday announced a 50-basis-point hike in the repo rate to 4.9 per cent. Repo rate is the rate at which the RBI lends money to commercial banks. This latest increase in the key rate follows a surprise 40-bps repo rate hike on May 4.

The increase in repo rate will impact both new and existing borrowers. With inflation likely to stay above the central bank’s tolerance limit, economists expect the RBI to front load rate hikes with another 50 basis points rate hike in the August policy.

The RBI also allowed cooperative banks to give out loans for residential projects—a move widely expected to take off some of the pressure of rising cost of funds for developers—in addition to increasing the limit of individual housing loans provided by them.

If the central bank increases repo rate, the cost of borrowing for retail and other loans by the banks also rises. While the interest rates for fixed rate loans, such as personal loans, remain same throughout the tenure, the floating rate loans such as home loans and auto loans are linked to an external benchmark set by the Reserve Bank of India. Most of the banks and non-banking financial companies (NBFCs) have linked their lending rates to the repo rate fixed by the central bank. So, when the repo rate goes up, the repo rate linked lending rate (RLLR) of banks also increases. However, instead of increasing the EMI, in most cases, the tenure of the loan is increased by lenders.

Madan Sabnavis, chief economist at Bank of Baroda said, “The higher interest rates will get transmitted directly for loans which are linked to external benchmarks such as home loans or SME loans.

“However, Marginal Cost of Funds based lending rate (MCLR) will be slower to react in terms of quantum of change. The same will hold for deposit holders who will receive higher rates depending on how banks adjust their rates based on their funding requirements. As there is surplus liquidity currently in the system which can go for lending, the immediate response may be slow.”

Apart from the repo rate hike, the MPC also unanimously voted to remain focused on withdrawal of accommodation. Shaktikanta Das, governor, RBI, said, “The MPC also recognised that sustained high inflation could unhinge inflation expectations and trigger second round effects. It, therefore, judged that further monetary policy measures are necessary to anchor the inflation expectations.”
The RBI raised its forecast for the retail Consumer Price Index (CPI) inflation by 100 basis points (compared to its estimate made in the April policy) to 6.7 per cent for this fiscal or above its tolerance band of 2-6 per cent.

The RBI however retained India's growth projection of 7.2 per cent for the current financial year.

The RBI raised the housing loan limits for Tier I and Tier II Urban Cooperative Banks to Rs 60 lakh and Rs 1.4 crore respectively.