Do you have an EMI? RBI rate hike to make your borrowings more expensive

The RBI raised interest rates to the highest in 2 years to tackle inflationary pressures.

RBI Policy: Planning to take a loan? You should not wait any longer. EMIs (equated monthly installments) on home, personal, auto and other loans are set to get costlier as the Reserve Bank of India (RBI) increased the repo rate by 25 basis points to 6.5 per cent from the previous rate of 6.25 per cent. The RBI has also raised the reverse repo rate by 25 basis points to 6.25 per cent. The decision was taken during the RBI’s Monetary Policy Committee’s (MPC) bi-monthly meeting on Wednesday.

In its last monetary policy meeting on June 6, the RBI had already increased the repo rate by 25 bps (basis points). Headed by governor Urjit Patel, the central bank raised key policy rates to the highest in two years for the second time in a row in last two months to tackle inflationary pressures. Over the last two bi-monthly MPC review meetings; there has been a total of 50 bps increase in the repo rate. The second-consecutive increase in repo rate comes as a shocker for those who are already paying EMIS, taken loans from banks or are planning to borrow in future.  RBI Rate Hike

You should be concerned about repo rate hike because it will directly affect your EMIs as banks will soon increase their lending rates. The repo rate has a direct impact on bank’s cost of borrowing from the central bank, that means the banks will raise their MCLR (Marginal Cost of Funds based Lending Rate) or charge more interest on loans. Hence, it makes costlier for lenders (banks) to borrow money. As the interest rate of loans is linked to the MCLR, repo rate surge causes a hike in interest or lending rates. Home loan borrowers will be affected to a great extent as housing loans are taken for a longer duration. In fact, since the beginning of this year, several banks have been increasing their MCLR rates, said a Livemint report.

New loan borrowers will have to bear the impact of increased interest rates on loans. RBI's second consecutive rate hike since October 2013, is likely to prompt action by banks or react to the policy decision, hence, EMIs will become expensive for potential loan seekers to borrow funds in future. If you cannot afford to pay higher EMIs, then you can prefer to borrow loan under the...continue reading

---

News Source: BS

RBI Policy Review: RBI increases repo rate by 25 bps to 6.25%; maintains neutral stance

The central bank’s April policy tone was dovish and it had actually lowered inflation forecasts for the first and second half of 2018-19.

 

RBI Monetary Policy → The six-member monetary policy committee (MPC) unanimously voted for a rate hike, citing the fear of inflation, partly flared by the recent spike in crude oil prices. The hike in policy repo rate to 6.25 per cent from 6 per cent was contrary to market expectation that the central bank will hold rates and the unanimous decision came as a surprise to the markets.

The central bank’s April policy tone was dovish and it had actually lowered inflation forecasts for the first and second half of 2018-19. On Wednesday, the inflation outlook was revised up once again.

With the hike in the June policy, the Reserve Bank of India (RBI) has reversed the rate cutting cycle it had engaged in since January 15, 2015. The last rate hike happened on January 28, 2014, when the repo rate was increased to 8 per cent. The last policy action was in August 2017, when the central bank had lowered the repo rate by 25 basis points (bps).

Even as the central bank kept its stance ‘neutral’, the bond market saw the policy statement as hawkish, expecting at least one more rate hike soon. The 10-year gilt yield, which had already factored in a 25-bp repo rate hike in rates, jumped 8 bps after the policy announcement. The 10-year gilt yield closed at 7.92 per cent, up from its previous close of 7.83 per cent.

Wednesday’s policy statement showed that the MPC was clearly concerned about rising prices, and, importantly, households’ expectations about the future course of prices. The May 2018 round of the RBI’s survey of households reported a significant rise in households’ inflation expectations of 90 bps and 130 bps, respectively, for three-month and one-year ahead horizons.

This “significant rise” in households’ expectations, “could feed into wages and input costs in the coming months”, the RBI’s policy statement noted.

Once again changing its inflation forecast, from 4.7-5.1 per cent for the first half and 4.4 per cent in the second half, to 4.8-4.9 per cent and 4.7 per cent, respectively, the RBI said it had not anticipated a 12 per cent rise ($66 to $74 a barrel) in the Indian basket of crude oil between the April and June policies.

Retail inflation rose sharply to 4.6 per cent in April from 4.3 per cent in March. Core inflation, which includes food and fuel, remained consistently high at 5.8 per cent in April, up from 5.23 per cent in March.

Also Read → RBI Policy Review