Explained: Here’s how RBI’s Repo rate hike of 50 bps impacts you

What does this rate hike mean?

The Repo rate hike, which comes after a 40 bps hike in May, will force banks and non-banking finance companies to increase repo-linked lending rates and minimum cost of funds based lending rates (MCLR) further. This is because the cost of funds of banks will rise with the Repo rate hike. The net result will be a further rise in equated monthly instalments (EMIs) of existing borrowers. Moreover, new home, vehicle and personal loans will also become costlier. Analysts also say consumption and demand can be impacted by the Repo rate hike.

Will rates rise further?

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The central bank is likely to focus on interest rate hikes over the coming months in a relatively short tightening cycle to rein in inflation. With inflation persisting beyond 6 per cent (the upper limit of the tolerance band) and growth chugging along, the RBI’s policy panel was widely expected to hike policy repo rate by 40 bps in June and another 35 bps in August, analysts said. The key thing is that RBI MPC is likely to exit ultra-accommodation by August and take policy repo rate to the pre-pandemic level of 5.15 per cent.

“Accordingly, until then, the RBI MPC is likely to retain the stance as accommodative while focusing on withdrawal of accommodation. Thereafter, as inflation continues to stay high, we see the RBI MPC take policy repo rate to 5.65 per cent by March 2023,” said a report from Bank of America Securities.

Impact of RBI Repo Rate Hike by 50 bps

Deposit rates to rise: Banks will have to increase the deposit rates in the coming months. Many banks have already raised deposit rates after the RBI raised Repo rates by 40 bps in May.

Growth rate retained: The RBI’s policy panel has retained India’s growth projection of 7.2 per cent. The National Statistical Organisation on May 31 projected India’s 2021-2022 at 8.7 per cent. Spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks and tightening global financial conditions nevertheless weigh on the outlook, RBI Governor Shaktikanta Das said.

Inflation worry remains: The projections indicate that inflation is likely to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23, the MPC said. This signals further rate action on the part of the RBI. Inflation is now projected at 6.7 per cent in 2022-23, Das said.

Outlook: According to the MPC, the tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook. The recovery in domestic economic activity is gathering strength. Rural consumption should benefit from the likely normal southwest monsoon and the expected improvement in agricultural prospects, MPC said.