Concerned about rising inflation, the Reserve Bank of India (RBI) has increased the repo rate by 0.50%. With this the repo rate has increased from 4.40% to 4.90%. That is, everything from home loans to auto and personal loans is going to be expensive and you will have to pay more EMI. The meeting of the Monetary Policy Committee was going on from June 6 to decide on interest rates. RBI Governor Shaktikanta Das informed about the decisions taken on interest rates in a press conference on Wednesday.
Repo rate and EMI connection
Repo rate is the rate at which banks get loan from RBI, whereas reverse repo rate is the rate at which RBI pays interest to banks on keeping money. When RBI reduces the repo rate, banks also reduce the interest rates most of the time. That is, the interest rates of loans given to customers are low, as well as the EMI also decreases. Similarly, when there is an increase in the repo rate, the loan becomes costlier for the customer due to the increase in interest rates. This is because commercial banks get money from the central bank at higher prices, which forces them to raise rates.
How much difference will a 0.50% rate hike make?
Suppose a person named Sudarshan has taken a house loan of Rs 10 lakh for 20 years at the rate of 6.5%. His loan EMI is Rs 7,456. In 20 years, he will have to pay an interest of Rs 7,89,376 at this rate. That is, he will have to pay a total of Rs 17,89,376 instead of 10 lakhs.
One month after taking Sudarshan's loan, RBI increases the repo rate by 0.50%. For this reason, banks also increase the interest rate by 0.50%. Now when a friend of Sudarshan reaches the same bank to take loan, the bank offers him 7% rate of interest instead of 6.5%.
Sudarshan's friend also takes a loan of Rs 10 lakh only for 20 years, but his EMI becomes Rs 7753. That 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. This is 71 thousand more than Ashish's amount.
Loan Amount (in Rs.) Tenure Rate of Interest (in %) Installment (EMI in Rs.) Total Interest (in Rs.) Total Amount to be Repaid (in Rs.)
10 lakh 20 years 6.50 7,456 7.89 lakh 17.89 lakh
10 lakh 20 years 7.00 7,753 8.60 lakh 18.60 lakh
The rate was increased by 0.4% in the last meeting
17 out of 41 economists surveyed by Bloomberg had projected the repo rate to be raised by 0.50% to 4.9%. Some economists believe that the RBI will gradually raise the repo rate above the pre-covid level of 5.15%. The monetary policy meeting is held every two months, but in the past, the RBI had called an emergency meeting on May 2 and 3 to increase the repo rate from 4% to 4.40%. This change was made in the repo rate after 22 May 2020. The first meeting of this financial year was held on 6-8 April.
Pressure on RBI to raise rates
Since the last meeting, 4 major changes have taken place in the country and the world:
1. With the opening of the lockdown in China, the demand for commodities like crude oil, steel increased worldwide.
2. In the international market, the benchmark crude Brent rose above $ 120 per barrel.
3. Bond yields reach 7.5% for the first time since 2019, feared to go up to 8%.
4. Inflation in Britain and the Eurozone rose above the 40-year record level of 8%, in such a situation, there is a fear of increasing global inflation.
RBI worried about rising inflation
The emergency meeting of RBI's Monetary Policy Committee (MPC) has been held at a time when there is a huge volatility in crude oil to metal prices due to Russia-Ukraine war. In such a situation, inflation has become a big problem all over the world. According to government data released in May, the Consumer Price Index (CPI) based retail inflation had risen to 7.79% in April. This was the peak of 8 years of inflation.
Inflation forecast for the financial year 2022-23
CPI (current estimate) CPI (previous estimate)
2022-23 6.7% 5.7%
April-June quarter 7.5% 6.3%
July-September quarter 7.4% 5.8%
October-December quarter 6.2% 5.4%
January-March quarter 5.8% 5.1%
GD Estimates for FY 2022-23
GDP (current estimate) GDP (previous estimate)
2022-23 7.2% 7.2%
April-June quarter 16.2% 16.2%
July-September quarter 6.2% 6.2%
October-December quarter 4.1% 4.1%
January-March quarter 4% 4%
There was already an estimate of increase in rates
RBI Governor Shaktikanta Das had said in an interview to a channel recently, 'RBI would like to increase rates at least 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 had said, 'There will be some increase in repo rates, but I will not be able to tell by how much...'
CRR was also increased by 0.50%
In the meeting held in May, RBI also increased the cash reserve ratio (CRR) by 0.50%. This was increased to 4.5%. CRR is the amount that banks have to keep with RBI at all times. If the central bank decides to increase the CRR, the amount available with the banks for disbursal gets reduced. CRR is used to reduce liquidity from the system.
Comments
Post a Comment