If RBI hikes off-cycle rates tomorrow, what will it mean for loan EMIs?

on 27 October, reserve Bank of India Announced an additional meeting of the MPC scheduled for November 3, 2022.

In the previous policy minutes of the meeting, the RBI had said that the next meeting of the MPC was to be held during December 5-7, 2022.

But the November 3 meeting was unexpected, especially just a day before the FOMC result for November 2022 policy, where a majority are expecting another aggressive growth of 75 basis points to cushion America’s multi-decade high inflation. are.

At the beginning of this financial year 2013, we all saw an astonishing 40 basis points increase in the repo rate on May 4, 2022, which was also an unscheduled MPC meeting. The decision was called for, especially amid geopolitical tensions coupled with inflationary pressures. This was only the beginning of the rate hike cycle and the RBI was not the only one to do so, as did many other major central banks such as the US Federal Reserve and the European Central Bank.

From May 2022, RBI has extended repo rate By 190 basis points for the fourth consecutive policy. Now the repo rate is 5.90%.

After the hike in rates, banks have also increased their rates. lending rate, According to the latest RBI data, the weighted average lending rate (WALR) on new rupee loans of SCBs increased by 26 basis points (bps) from 8.33% in August 2022 to 8.59% in September 2022.

Further, the 1-year average marginal cost based lending rate (MCLR) of SCBs increased from 7.75% in September 2022 to 7.90% in October 2022.

Why is there a possibility of a hike in rates from the November 3 meeting?

Firstly, most experts have noted the rate hike trend till the end of December 2022 as inflation continues to rise and is expected to slow down from the next fiscal.

In September 2022 (latest print), India’s inflation hit a 5-month high of 7.41% due to rising food prices. Inflation remains at its highest level in many years. The Consumer Price Index (CPI) has also remained above the RBI’s upper tolerance limit of 6% for the ninth consecutive month.

During the previous policy (September 2022), RBI had projected CPI inflation to be 6.7% by the end of FY23. Inflation is seen at 6.5% in Q3 as compared to 5.8% in Q4 of FY23. For the first quarter of FY23, inflation is seen at 5%.

RBI’s monetary policy decisions align with the objective of achieving the medium-term target for consumer price index (CPI) inflation within a band of +/- 2%, supporting growth of 4%.

Inflation remains under pressure, and the market remains volatile, while the rupee weakens against the US dollar coupled with a fall in forex reserves. On the other hand, fears of a ‘recession’ in major economies like the US and Europe, geopolitical tensions, supply-chain disruptions and energy crises are some of the other factors that have blurred the prospects for global economic growth.

As for RBI’s November 3 meeting, Livfin MD and CEO Rahul Chander said, “The unscheduled meeting of the Reserve Bank of India’s Monetary Policy Committee this week is unlikely to be a surprise with an off-cycle rate hike, even if it One day after the Federal Reserve’s policy decision and unseasonal rains have damaged crops, intensifying inflationary pressures on the Indian economy.”

According to Chander, the MPC has gone for a cumulative 190 basis points of a key policy rate hike since May, taking the repo rate to pre-Covid levels. Encouraging employment numbers, showing the fastest growth in three years on the back of strong factory output, is another factor that will influence any RBI decision to hike rates at this juncture.

“If the MPC goes for another round of rate hikes, it will add to the concerns of NBFCs as they struggle to maintain profitability in an already challenging economic environment, as the steady rise in interest rates will not only increase the interest rates for borrowers, but also increase their interest rates. Lowers the number of borrowers rather than a serious risk of default from existing borrowers,” Chander said.

Further, Chander said, “The measure of profit for an NBFC is the difference between the cost of borrowing, which essentially means that these institutions must raise funds to lend it to consumers, and the cost of credit.” , which means additional charges on the loan.”

Both banks and NBFCs have substantially hiked their benchmark lending rates from May this year in order to increase the cost of borrowings of funds, which usually go up in a rate hike scenario.

Last week, Dr. Joseph Thomas, Head of Research, Emkay Wealth Management, said, “The special additional meeting of the MPC convened by RBI on November 3, 2002, and the possibility of further hike in rates in view of persistent inflation is such that the market Looking at this time with caution. We may continue to see some volatility in the markets in the new week.”

The outcome of the RBI meeting will play an important role in influencing the market sentiment in the coming days.

On November 2, RBI Governor Shaktikanta Das said at an annual FIBAC 2022 conference that the current global economy is sailing in extremely turbulent waters. Despite the enormous challenges, the Indian economy has made relatively good progress.

Das said, “I want to influence banks and businesses to strengthen their resilience and focus to meet market demand. They should continuously assess risk creation, if any, to governance. capital and other buffers. As far as the RBI is concerned, we are committed to supporting and protecting macroeconomic and financial stability. Once again, this There’s a moment of ‘whatever it takes’.”

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