AUGUST 4, 2022
The Reserve Bank of India (RBI) will announce the decision of its bi-monthly Monetary Policy Committee on August 5. India’s central bank is expected to increase the repo rate by 25-50 basis points, according to a poll conducted by News18.com. “The RBI MPC in its August policy announcement is likely to hike rates upward of 35 basis points, however, I don’t anticipate a jumbo-sized hike like other major central banks namely United States Federal Reserve or European Central Bank,” said Ravi Subramanian, managing director & chief executive officer, Shriram Housing Finance. “This is because in the absence of any fresh shocks, economic conditions in India have marginally improved and therefore an aggressive rate path is not warranted,” he said.
Repo rate refers to the rate at which commercial banks borrow money from the Reserve Bank of India. If the central bank increases repo rate, the cost of borrowing for retail and other loans by the banks, also goes up. Banks will pass on the rising cost to the borrowers by hiking the interest rates of loans. As a result, home loan borrowers will have to shell out more in terms of equated monthly installments (EMIs).
The Reserve Bank of India has raised repo rates twice since May to 90 basis points. When RBI hikes repo rate, the banks keep the EMI constant for the existing borrowers and increase the tenure of the loan. This will impact the interest charged on the loan. “With around 40 per cent loans’ rates in the banking system linked to external benchmarks, as the RBI hikes the repo rate, cost of borrowing will keep increasing. Retail loans such as home loans are mostly linked to external benchmarks and will see a pass-through of higher policy rates. Amongst banks private sectors have a relatively larger share of loans which are in the external benchmark based lending rate (EBLR) regime,” said Suvodeep Rakshit , senior economist, Kotak Institutional Equities.
“The MPC is expected to unanimously vote for an upward of 35 bps hike in policy rates in August 2022. The domestic macro-economy hasn’t changed much since the previous policy and the suggested higher rate environment is priced in. Q1 Inflation has surprised on the positive side by softening, however, underlying core prices continue to remain elevated at around 6%+, above the central bank’s comfort. However I don’t anticipate any large hikes, since it will go against the palpable recovery in productive Infrastructure sectors, such as power and transport, etc. which are inputs for production in the directly productive sectors, viz. agriculture, manufacturing, etc and have the highest forward and backward linkages in the economy,” Kamra added.
Explaining the rate hike, Pranjal Kamra- chief executive officer, Finology Ventures said, “A rate hike means the cost of funds for banks and financial institutions has increased. In turn, banks would pass on this cost to the borrowers by increasing their lending rate. Therefore, the EMI amount of the borrowers of all retail floating rate loans like home loans, car loans, and gold loans would increase.”