Monthly installments (EMIs) are expected to rise as the Reserve Bank of India (RBI) announced a surprise hike of 40 basis points in the repo rate amid high inflation levels.
In its first unscheduled rate change since the depth of the pandemic, the Reserve Bank of India raised its repurchase rate to 4.40%, down from a record low of 4% over the past two years to support the economy.
The EMI of a floating rate loan varies with the change in market interest rates. If the market rate rises, the repayment goes up. When rates fall, the outstanding also falls.
When the central bank raises the interest rate or repo rate – the rate at which banks borrow from the RBI – the loan will become costlier for the customer due to the increase in interest rates by banks.
This is because banks obtain funds from the central bank at higher prices, which forces them to raise their lending rates.
“RBI has increased the repo rate by 40bps and CRR by 50bps till May 21, 2022 with immediate effect. The rate hike was the much-awaited factoring increase in food and general inflation. The rate hike is likely to shrink liquidity in the economy as a whole. As banks are concerned, the cost of funds is likely to go up, so the cost of deposits also goes up,” said Ajit Kabi, banking analyst at LKP Securities.
The Reserve Bank has also announced an increase in the cash reserve ratio (CRR) by 50 basis points to 4.5% with effect from May 21. 87,000 crore liquidity from the system. CRR is a percentage of a bank’s total deposits that it needs to maintain in the form of liquid cash.
Persistent inflationary pressures are becoming more intense, Governor Shaktikanta Das said in an online briefing, adding that risk prices remain at this level for “very long” and expectations go unchecked. The bank’s next scheduled rate decision is not till June 8. ,
RBI policymakers have recently begun to indicate that higher rates are in the works as consumer prices have crossed the upper limit of the bank’s target during the first quarter of 2022.
The move comes ahead of the Federal Reserve’s rate decision on Wednesday, which is expected to see the US central bank’s most aggressive action to fight inflation in decades.
Rising fuel and food prices, Russia’s invasion of Ukraine and supply chain disruptions related to the continuing pandemic have turned the RBI hotter than expected this year. Headline inflation rose to a 17-month high of 6.95% in March, above the RBI’s 2%-6% target range for the third month.
After reaffirming its liberal stance in February – a move criticized by some economists as too benign on the risk of rising prices – the central bank said last month that it would start prioritizing inflation over supporting growth. Will give
In April the RBI raised its inflation forecast for the fiscal year beginning April 1 to 5.7%, up from its 4.5% in February, and said it would expect GDP growth during the year to be 7.2%, compared to 7.2%. in comparison to the previous expectation of 7.8. ,