The Reserve Bank of India (RBI) on Wednesday increased repo rate by 25 basis points to 6.50 percent.
The Monetary Policy Committee (MPC), while retaining its 'neutral' stance, said inflation remained a major concern. This is RBI's second consecutive interest rate hike. The last time the RBI raised interest rates in two consecutive policies was in October 2013.
Impact on EMIs
EMIs or equated monthly installments is what borrowers pay to banks or financial institutions they have taken loans from. These financial institutions base the interest rate they charge for lending money on the repo rate fixed by the RBI.
As RBI has raised interest rates by 25 basis points, it is likely that banks will follow the decision and pass on this rate increase to its customers, i.e. you.
What this means is, if you have a running loan which is based on a floating interest rate, then it is likely to get expensive as your EMI burden will increase, albeit marginally.
Usually, home loans are based on floating interest rates as these are loans of longer duration like 25-30 years. Personal and car loans are fixed in nature as they tend to have maximum repayment schedule of five to seven years.
The MPC increased repo rate in order to keep inflation in check. RBI statement said, "Increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation."
It said even as inflation projections for the second quarter of this year have been revised marginally downwards vis-àvis the June statement, projections for Q3 onwards remain broadly unchanged. "Several risks persist, RBI said, adding, "First, crude oil prices continue to be volatile and vulnerable to both upside and downside risks. Second, volatility in global financial markets continues to impart uncertainty to the inflation outlook. Third, households’ inflation expectations, as measured by the Reserve Bank’s survey, have risen significantly in the last two rounds, which could influence actual inflation outcomes in the months to come. Fourth, manufacturing firms polled in the Reserve Bank’s industrial outlook survey have reported hardening of input price pressures in Q2 of 2018-19. Fifth, though the monsoon has been normal temporally so far, its regional distribution needs to be carefully monitored in the context of key CPI components such as paddy. Sixth, in case there is fiscal slippage at the centre and/or state levels, it could have adverse implications for market volatility, crowd out private investment and impact the outlook for inflation. Seventh, uncertainty around the full impact of MSP on inflation will only resolve in the next several months once the price support schemes are implemented. Finally, the staggered impact of HRA revision by state governments may push headline inflation up. While the statistical impact of HRA revisions will be looked through, there is need to watch out for any second-round impact on inflation."
Based on the above mentioned factors, the MPC reiterated its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis.
India's largest bank, the State Bank of India (SBI) on July 30, 2018 increased its fixed term deposit interest rates by up to 10 basis points, with immediate effect.
The deposits for 1 year to 2 years will now receive 6.7 percent interest against the previous 6.65 percent.
First Published: IST