RBI’s 50bps repo-rate hike: How will it impact your money?

Central banks typically raise the benchmark repo rate – the interest rate at which commercial banks borrow money by selling their securities to the Reserve Bank – to shrink money supply in the economy

The Reserve Bank of India’s monetary policy committee on Friday raised the benchmark repo rate by 50 basis points to 5.4%, its third hike in a row, to rein in high inflation.

Central banks typically raise the benchmark repo rate to shrink money supply in the economy. (File image)

Central banks typically raise the benchmark repo rate – the interest rate at which commercial banks borrow money by selling their securities to the Reserve Bank – to shrink money supply in the economy.

Lower interest rates make for easy borrowing and businesses typically borrow to invest in new economic activities. Therefore, more cash supply increases inflation because more money chases fewer goods, since money supply can be increased overnight, but not purchasable goods, which need considerable time to produce.

The increase in repo rate by 50 basis points has two broad implications. New borrowers and existing repo rate-linked long-term retail loans will get costlier, says Sebi-accredited investment adviser Vikram Vishwanathan.

Since the interest rate at which banks borrow will now go up, retail loans such as personal loans, auto loan, home loan will get costlier. So, new borrowers should expect EMIs to go up.

On the flip side, bank depositors will get higher returns on their deposits depending on how banks pass on the new interest rate hike. These deposits include fixed deposits.

Some banks, which link their retail loans to the repo rate, are likely to restructure home and auto loans.

Experts such as Vishwanathan say retail consumers with long-term loans, such as home or auto loans, should check with their banks for implications of Friday’s repo rate hike on their long-term loans.

The RBI’s latest interest rate hike was widely anticipated as inflation remained above the central bank’s comfort zone. As global prices soared, fanned by rising oil, India’s central bank first effected a 40-basis point hike at an unscheduled meet in May. It raised the repo rate again by 50 basis point in June.

The Reserve Bank Governor, Shaktikanta Das, on Friday said consumer price index (CPI) inflation remains “uncomfortably high” and is “expected to remain above 6%” The Reserve Bank kept the CPI forecast for FY23 unchanged at 6.7%.

India’s retail inflation eased for the second month in a row but only a tad to 7.01% in June from a year ago, official data on Tuesday showed. Consumer prices, which rose 7.04% in May, continued to breach the Reserve Bank of India’s upper limit of 6% for the sixth straight month.