The Reserve Bank of India’s monetary policy panel raised the key lending rate, commonly known as the repo rate, by 50 basis points to 5.90% for the third time in a row to battle inflation. This was done after numerous other financial institutions and central banks took similar measures to tone down the surging currency and curb growing expenses.
The monetary policy committee (MPC) constitutes three RBI employees and three people from outside the RBI. Five of the six members of the MPC voted in favor of the increase.
Now, before we tell you how will this move of RBI impact your loan interest rates, let us understand what is repo rate.
What is Repo Rate?
The term repo rate refers to the interest rate that commercial banks pay to borrow money from the country’s central bank, i.e. Reserve Bank of India or RBI. If there is inflation in the economy, the RBI raises the repo rate. On the other hand, when there is deflation, the RBI lowers the repo rate. RBI increases the repo rate to remove the excess supply of money from the market.
So, why is the year 2022 significant in terms of the repo rate?
Repo Rate – What Has Happened So Far in 2023?
On September 30, 2022, the RBI raised the repo rate by 50 basis points, making it 5.9%.
The RBI has raised the repo rate four times so far this fiscal year. The repo rate was raised to 5.4% by the central bank in early August. After the announcement, the reverse repo rate stayed at 3.35 percent, and the current repo rate is now at 5.9 percent.
So, the repo rate has increased. The bigger question is, how will this affect you?
Let’s understand how the increase in the Repo rate will affect the country’s economic growth, inflation, loans, EMIs, deposits, fixed deposit rates, mutual funds, savings, consumer spending, etc., and let us also look at how different parts of the Indian economy and investments will be affected by RBI’s repo rate increase.
Effect of Repo Rate Increase on How the Economy Grows
Though necessary to combat inflation, a series of rate hikes over a short period of time is predicted to have an unanticipated negative impact on economic growth.
People may buy less goods and services because the repo rate is going up. This could affect demand, which could slow growth.
As a result, products and services may become too expensive for the average Indian.
How Repo Rate Change Will Affect Inflation
Even though this decision was only made to fight inflation, India’s economic growth can decline drastically because of these constant repo rate hikes. However, this will happen only if the inflation-growth picture doesn’t improve.
Effect on Deposits and Rates for Fixed Deposits
Bank deposit interest rates usually climb when the repo rate rises. Based on how banks accept the new interest rate hike, consumers with short and medium term investments like fixed deposits and savings may profit from higher rates because they will receive larger returns.
How Will This Affect Mutual Funds
After the RBI raised the repo rate, mutual fund investors, especially debt fund investors, should be cautious. Rate hikes immediately impact debt mutual funds, especially long-term bond funds. This is because when yield goes up, bond prices go down, which makes the return on debt investments go down. Because of this effect, debt investors have to pull their money out of the market and wait for the bond price to go up so they can make more money. Debt funds may have short to medium term volatility because of RBI-induced rate hikes.
How Repo Rate Hikes Will Affect Your Loans and EMIs
When the Reserve Bank of India raises interest rates, it has a knock-on effect on everything from home loans to auto loans to student loans to personal loans to business loans to credit card rates. As lenders raise interest rates, EMIs for people who already have loans will go up. This will make them less interested in making further big ticket purchases like buying a home. Therefore, home loan demand could suffer.
A greater cost of borrowing discourages needless purchases, which lowers consumption. This greatly impacts supply and demand chains.
Effect on Individual Spending Capacity
Increased borrowing costs discourage major purchases and lowers demand for goods and services. One of these high price purchases is a home. If the demand for homes reduces, so does the demand for home loans.
There may be a drop in demand and supply as a result of higher borrowing costs and lower liquidity. Because of this, the prices of many goods and services could go up, making them too expensive for people with less money to buy.
However, the average person will gain from improved consumption capacity when inflation moderates in the medium run.
RBI adjusts the repo rate in response to macroeconomic circumstances. When the Reserve Bank of India adjusts interest rates, the move has repercussions across the economy. Some parts of the market will benefit from the rate increase, while others will suffer. For instance, loan EMIs will increase if the repo rate goes up. So, if you have an existing home loan, you’ll have to pay higher EMIs.