RBI Increases Repo Rate By 25bps, EMIs Likely To Go Up

The Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday announced the increase in the repo rate by 25 basis points (bps) to 6.50 per cent after the three-day Monetary Policy Committee Meeting.

The central bank had raised 35 bps. The RBI has increased the rate by 250 basis points since May last year to contain the inflation in the country.

While announcing the decision of Monetary Policy Committee, Das said, “Monetary policy was confronted with an unprecedented contraction in economic activity followed by a surge in global inflation.”

Adding that real GDP growth for 2023-24 is projected at 6.4 per cent, he said, “Amid volatile global developments, the Indian economy remains resilient.”

Meanwhile, inflation is expected to moderate in 2023-24, it is likely to roll above the 4 per cent target, he added.

He also said that commitment to fiscal consolidation which has been carried forward in Budget 2023 and the future trajectory of reducing gross fiscal deficit will engender an environment of macroeconomic stability.

The repo rate increase would lead to longer tenure or higher EMI for home loan borrowers. The banks could increase the loan tenure so that the EMI remains unchanged, but the number of years for payment increases. According to industry experts, banks and other financial institutions increase their lending rates as their borrowing cost increases, making EMIs costlier.

As the repo rate increases, your car loan would also go up. In the case of personal loans, public-sector banks (PSUs) offer loans at floating interest rates, while private banks offer at fixed interest rates. Hence, if your personal loans are based on floating interest rates, the EMIs would also go up. Therefore, you need to prepare accordingly to handle EMIs.

What does Industry Say?

Dinesh Khara, Chairman, SBI said, “RBI decision to hike the rate was in consonance with the expectations. Continuing strong job data from Fed has made monetary policy making a delicate balancing act for emerging economies central banks. Beyond the rate hike, there are a bouquet of policies that attend the micro structure of the market.”

He said that the proposal to address the issue of penal charges on services will bring a rule based regulation. The initiatives on climate risk will improve compliance, capital budgeting and financial disclosures for banks. Providing further impetus to TReDS platform in terms of further augmentation of activities and allowing lending and borrowing government securities will add depth and aid price discoveries across markets.

Vikas Garg, Head of Fixed Income, Invesco Mutual Fund said that RBI walked the talk and moderated the policy rate hike to 25 bps with a continuation of “withdrawal of accommodation” stance, in line with our expectation.

Garg said, “A growth-oriented FY24 budget coupled with resilient domestic growth requires tight vigil on core inflation. Global factors provide some uncertainty and may also have a bearing on further policy action. Overall, it was a slightly hawkish commentary compared to market expectations. Future rate actions will be calibrated and more data-dependent as we approach the end stage of the current rate hike cycle. Higher policy rates may stay with us for a bit longer.”

Marzban Irani, Chief Information Officer (CIO)- Debt, LIC Mutual Fund said that it was a good time to invest in Fixed Income schemes as the yield curve is attractive across maturities. Investors may invest in Liquid and Low duration category at the short end of the curve and in Medium to Long duration category at long end of the curve as per investors’ risk appetite.

Meanwhile, Indranil Pan - Chief Economist, Yes Bank said The policy was well balanced with the focus remaining on removal of accommodation.

“The RBI remains focused on core inflation and clearly highlights that the recent softening of inflation was mostly due to the strong seasonal deflation in vegetables, and this might go away in the summer months. The estimates for average inflation are at 5.3 per cent for FY24, still higher than the 4 per cent aspirational target of the RBI. At the current repo rate of 6.5 per cent and last inflation print of 5.7 per cent, the real policy rate has moved to 0.8 per cent. However, the governor indicated that adjusted for inflation, the policy rate is still lower than the pre-pandemic levels.”

Growth dynamics are seen to be relatively stable and this may also indicate a lower dis-inflationary pressure in the economy, hence calling for any credible central bank of the EME to remain hawk-eyed. Inflection points are always difficult to call, but I think that the rate hiking cycle of the RBI may yet not be over. We remain open to another 25bps increase in the repo rate in April or even later and will critically depend on the inflation prints in the months ahead. For record, our model suggests that the next CPI print can surprise on the higher side to 6.2-6.4 per cent, as food prices are seen to have largely normalized based on data obtained from the Department of Consumer Affairs, Pan added.