The Reserve Bank of India (RBI) has recently announced a hike in the repo rate by 25 basis points (100 bps = 1%) to 6.5%. This move was anticipated by the market and experts, but it has caused concern among borrowers, especially those who have taken home loans. In this post, we will discuss the implications of the RBI repo rate hike and how it will impact you.
What is Repo Rate?
The RBI uses the repo rate as a tool to control inflation and economic growth in the country. Before we dive into the impact of the RBI repo rate hike, let’s first understand what repo rate is. Repo rate is the rate at which the RBI lends money to commercial banks. When banks need funds to meet their daily cash reserve requirements or to lend to their customers, they borrow from the RBI. The repo rate is the interest rate at which the RBI lends money to banks for a short term, usually overnight.
Impact of RBI Repo Rate Hike on Home Loans
The repo rate hike by the RBI will have an impact on the interest rates charged by banks on their loans. Banks are likely to pass on the increased cost of borrowing from the RBI to their customers. This means that the interest rates on home loans, car loans, and personal loans are likely to increase in the near future.
For example, if you have taken a home loan of Rs. 50 lakhs at an interest rate of 8.5%, your EMI (equated monthly instalment) would be around Rs. 43,391 for a tenure of 20 years. If the interest rate increases by 25 basis points, your EMI will increase to around Rs. 44,325. This may not seem like a significant increase, but over the entire tenure of the loan, the additional interest paid can be substantial.
If you are planning to take a home loan in the near future, it is advisable to do it now before the interest rates increase further. This is because the RBI has indicated that it may hike the repo rate further in the coming months to control inflation.
Impact of RBI Repo Rate Hike on Fixed Deposits
While the repo rate hike is bad news for borrowers, it is good news for savers. Banks are likely to increase the interest rates offered on fixed deposits (FDs) to attract more deposits. This is because the cost of borrowing from the RBI has increased, and banks will need more deposits to meet their lending requirements.
If you have some surplus funds, it is a good idea to invest them in fixed deposits to earn higher returns. However, it is important to note that the interest rates offered by banks on FDs are not fixed and can change at any time. Therefore, it is advisable to lock in your deposits for a longer tenure to avoid frequent changes in interest rates.
Impact of RBI Repo Rate Hike on the Stock Market
The repo rate hike by the RBI has a mixed impact on the stock market. On the one hand, it signals that the RBI is serious about controlling inflation, which is a positive sign for the economy. On the other hand, it increases the cost of borrowing for companies, which can have a negative impact on their profits.
In general, the stock market reacts negatively to repo rate hikes, as it signals a tightening of monetary policy. However, the impact of the repo rate hike on the stock market is not always predictable, and it depends on various other factors such as the overall economic conditions, corporate earnings, and global cues.
Impact of RBI Repo Rate Hike on SLR Rate
The RBI repo rate hike also has an impact on the statutory liquidity ratio (SLR) rate. SLR is the percentage of deposits that banks need to maintain in the form of liquid assets such as government securities, cash, and gold. The SLR rate is determined by the RBI, and it is currently at 18.0%.
When the repo rate is hiked, the cost of borrowing for banks increases. This makes it more expensive for banks to borrow money from the RBI, and they may choose to borrow less. This, in turn, reduces the liquidity in the market, and banks may find it difficult to meet their SLR requirements. To address this issue, the RBI may reduce the SLR rate to increase liquidity in the market. This will allow banks to meet their SLR requirements without borrowing heavily from the RBI.
Final Thoughts
The RBI repo rate hike has both positive and negative impacts on the economy. While it signals the RBI’s commitment to controlling inflation, it also increases the cost of borrowing for individuals and businesses. The impact of the repo rate hike on different sectors of the economy varies, and it is important to understand how it will impact you personally.
If you are a borrower, it is advisable to take a loan now before the interest rates increase further. If you are a saver, you can earn higher returns by investing in fixed deposits. The impact of the repo rate hike on the stock market and the SLR rate is not always predictable, and it depends on various other factors.
To sum it up, the RBI repo rate is an important tool used by the RBI to control inflation and economic growth in the country. It is important to stay updated on the changes in the repo rate and how they will impact you personally.
