Reserve Bank of India decided to hike the repo rate by 40 basis points (bps) to 4.40 percent. This will lead to a surge in loan interest rates, which means EMIs on home, auto, and personal loans will go up.
The rising inflation, geopolitical tensions, high crude oil prices, and shortage of commodities globally due to the war crisis in Ukraine and Russia have impacted the Indian economy. Thus, to keep a check on inflation, which is close to 7%, and to control and monitor money flow into the banking system when the global economy is facing turbulent times, RBI decided to increase the repo rates. This change in repo rate was witnessed after almost three years of the last hike in August 2018 from 25 bps to 6.50 percent. It is expected that the move to increase the repo rate will help in bringing down inflation.
RBI also announces the surge in cash reserve ratio(CRR) on Wednesday. CRR has now increased by 50 basis points to 4.5%, which means that banks will need to keep more money with the Central bank. This will reduce the loan-giving power of banks since they will be left with less money to lend to their customers. This move would drain ₹87,000 crores of liquidity from the banking system- as per the statement by the Governor of RBI Shaktikanta Das. The CRR hike will be effective from May 21.
Repo Rate Explained
In full terms, the' REPO' means 'Repurchasing Option' or the 'Repurchasing Agreement'. It is the rate at which the central bank of India– RBI lends money to the commercial banks when these banks are short of funds.
An increase in repo rates makes it expensive for the banks to borrow from the central bank of India. This ultimately helps in controlling Inflation.
Effects of a repo rate hike.
A decrease in repo rate cuts off the cost of borrowing from commercial banks from RBI. This ensures a lower interest rate on the loans borrowed by the bank account holder of the respective banks.
But now, since the repo rates have increased, this will force the banks and non-banking financial companies (NBFCs) to raise their lending and deposit rates of rate. This will lead to an increase in the interest rates on loans. Equated monthly installments (EMIs) on homes, vehicles, and other personal and corporate loans will show an upside movement.
Whereas the decision of the RBI to raise the repo rate will be favorable in the case of the depositors who has their FDs in the banks. The banks are likely to increase the interest rate on the FDs to encourage the opening of more FDs, which will, in return, provide the bank with the power to lend more money to the borrowers.
"The surge in repo rate is an effective measure taken by RBI to combat inflation and its current impact on the economy. A Repo rate increase means people need to pay a slightly higher interest rate if they take out a home loan. However, this move may not have a drastic effect on the home loan market. But, if the repo rate continues to hike, it may have an effect." said Atul Monga, Co-Founder & CEO of BASIC Home Loan.
How do you deal with the increased interest rates on the home?
If the borrowers want to reduce the EMI burden, which will be on them due to increased home loans, they can increase the loan tenure. This means the borrowers will need to pay the same EMI for a longer tenure than before due to an increase in interest rate. This is a general practice done by the borrowers to overcome the burden of EMIs. At the same time, doing the part pre-payments on their loan to reduce a monthly installment will also be a good option. Pre-payments can be done in the case of long-term loans like home loans. Doing the pre-payments of at least 3-5% percent will also be helpful to increase your savings.