Loans will be expensive
Concerned over rising inflation, the Reserve Bank of India has again hiked rates. It has been increased from 4.40 per cent to 4.90 per cent, which means your loan will become more expensive and you will have to pay more EMI. The Monetary Policy Committee has been meeting since June 6 to decide on interest rates. RBI Governor Shaktikant Das today announced the decision to raise interest rates at a press conference.
Economists predicted an increase in the repo rate
Seventeen of the 41 economists surveyed by Bloomberg forecast the repo rate to rise from 0.50 percent to 4.9 percent. Some economists believe that the RBI will gradually push the repo rate above the pre-covid level of 5.15%. Monetary policy meetings are held every two months. Earlier, the RBI had called an emergency meeting on May 2 and 3 and raised the repo rate from 4 per cent to 4.40 per cent. This change in repo rate occurred after 22 May 2020. The first meeting of this financial year was held on 6-8 April.
Connection of repo rate and EMI
The repo rate is the rate at which banks receive loans from the RBI, while the reverse repo rate is the rate at which banks pay interest on RBI deposits. When the RBI lowers the repo rate, the bank also lowers the interest rate, which means that the interest rate on consumer loans is lower, as well as the EMI. This way, when the repo rate goes up, the interest rate hike makes the loan more expensive for the consumer. This is because the commercial bank receives money from the central bank at a high price, so it is forced to raise rates.
What difference does a 0.50% rate increase make?
Let us understand this by example
Suppose a man named Sudarshan has taken a house loan of Rs 10 lakh for 20 years at a rate of 6.5 per cent. The EMI of the loan is Rs. 7,456. In 20 years, at this rate, he will have to pay interest of Rs. 7,89,376, which means he will have to pay a total of Rs.
One month after Sudarshan took a loan, the RBI hiked the repo rate by 0.50 per cent. As a result, banks are also raising interest rates by 0.50 per cent. Now when a friend of Sudarshan goes for a loan in the same bank, the bank offers him 7% rate of interest instead of 6.5%.
Ashish and Sudarshan are friends. Sudarshan’s friend also takes a loan of Rs 10 lakh for 20 years, although his EMI is Rs 7753, which is Rs 297 more than Sudarshan’s EMI. Because of this, Ashish’s friend will have to pay a total of Rs 18,60,717 in 20 years. That is 71 rupees more than the amount of Ashish.
Pressure on RBI to raise rates
The central bank had earlier raised the repo rate on May 4 and since then there have been four major changes in the country and the world: 2. The benchmark crude Brent in the international market went above 120 120 per barrel. 3. Bond yield reached 7.5 percent for the first time since 2019, likely to go up to 8 percent. 4. Inflation in Britain and the Eurozone rose above the 40-year record level of 8%, with global inflation rising.
RBI concerned over rising inflation
The emergency meeting of the RBI’s monetary policy committee comes at a time when crude to metal prices are fluctuating due to the Russia-Ukraine war. Inflation is a major problem worldwide. Consumer price index (CPI) -based retail inflation rose to 7.79% in April, according to data released in May. This was the 8 year peak of inflation.
Rates were already projected to rise
RBI Governor Shaktikant Das said in an interview to a channel that the RBI would raise rates in the next few meetings. I myself have said in my minutes that one of the reasons for the off-cycle meeting in May was that we did not want more strong action in June. He also said that there would be a slight increase in repo rates, although at present I could not say how much.
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CRR also increased by 0.50%
At its May meeting, the RBI also raised its cash reserve ratio by 0.50%. It was increased to 4.5%. CRR is the amount that banks have to keep with the RBI at all times. This means that if the central bank decides to increase the CRR, the amount available for disbursement to the bank decreases. CRR is used to reduce liquidity from the system.
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