How RBI repo rate hike may impact you

Just like the US Fed, India’s central bank too didn’t spring a surprise this time, as it jacked up the repo rate by 50 basis point last Friday. The repo rate -- at which the RBI lends money to commercial banks -- now stands at 5.40 per cent. And with this hike, the repo rate is now slightly above the pre-Covid level of 5.15%.

The central bank had slashed the repo rate during the pandemic to help shore the economy which was in a tight spot. While the Standing Deposit Facility, or SDF rate now stands at 5.15 per cent, while the Marginal Standing Facility, or MSF, rate is at 5.65 percent.  

For RBI, inflation is still a concern. CPI inflation has remained above the upper band of its mandated 2-6 percent range for six straight months up to June. The inflation for June was 7.01 per cent. The RBI retained its CPI inflation forecast of 6.7 per cent for FY23. CPI inflation is seen at 7.1 per cent in July-September, 6.4 per cent in October-December, and 5.8 per cent in January-March.  This forecast points to the likelihood of the RBI MPC failing to meet its mandate of ensuring that average inflation does not stay above the target band for more than three successive quarters. In the event of such a failure, the RBI has to provide an explanation to the government. 

Now, let us see how RBI’s move will affect us. It could prove to be costly for new borrowers and those with existing repo rate-linked long-term retail loans. Jitendra Solanki, a SEBI registered tax and investment expert, told a financial daily that banks were expected to raise interest rates on retail loans, such as personal, home, and auto loans. Thus, the EMIs on your home, car or bike loans are expected to rise. According to experts, a hike in interest rates on long-term retail loans will raise the EMIs of at least some existing borrowers as well if their loan is repo rate-linked, especially in the case of home and auto loans.

India Sotheby’s International Realty CEO Amit Goyal was reported saying that home loan rates were expected to settle at about 8 per cent per annum. Existing home loan borrowers are staring at either a longer tenure or higher EMI. The bank’s default option is to increase the tenure in such a way that the EMIs don't change. However, the borrower will not only bear the brunt of an increased tenure, but also the burden of extra interest outgo.  So, there could be a short-term dent in the mid and affordable housing segment demand.

[Byte of BankBazaar.com CEO Adhil Shetty on home loans]

Now, let us come to some good news. The three consecutive rate hikes mean further momentum for rising fixed deposit interest rates. Note that 8 per cent interest on FDs is an important benchmark because returns above this level are considered decent. FD rates hitting 8 per cent will depend on the duration of the rate hike cycle. According to experts cited by one financial daily, there is still scope for a 50-100 bps hike in the coming 3-4 quarters.

Given the momentum of RBI rate hikes, it could be reasonable to expect that FD interest rates could close in on 8 per cent within a year or two. This might not be the right time to book an FD for the long term. In the present growing rate scenario, you should book an FD with a short tenure. Thus, going in for FDs with a tenure of 6 months to one year might prove to be a better bet. And, when these FDs mature and get you a better rate once it's time for renewal, you can opt for longer-term FDs.  

Deepesh Raghaw, Registered Investment Advisor says, even if FD rates go up, transition will be slow and not happen overnight. Whether there will be a shift to FDs from markets will depend on the commentary and market volatility

And what about the impact on India Inc's investment cycle?

Madan Sabnavis, chief economist at Bank of Baroda says, investments by large companies won't be impacted. Buoyant demand will aid steel and cement industry investments. SME investments will be impacted

So all eyes remain on inflation, with the Russia-Ukraine war continuing and the threat of new geopolitical tensions rising in Asia.