RBI rate hike: Good news for FD depositors, bad news for EMI payers
The RBI on Wednesday raised its key lending rate by 40 basis points to 4.40 per cent with immediate effect. The central bank also hiked the cash reserve ratio by 50 basis points. The decision was taken by the monetary policy committee (MPC) in an off-cycle meeting with the central board held from May 2-4.
The last time repo rate was cut was in May 2020 and has been kept unchanged since then. Hike will come into effect immediately. Further, the Cash Reserve Ratio (CRR) has been hiked by 50 bps which will exert further upward pressure on interest rates. The surprise hike completely reverses the Covid-support off-cycle rate cut in May 2020.
Also read: RBI will have to raise rates at some point, move not “anti-national”: Raghuram Rajan
Bad news for borrowers
It appears that borrowers should prepare for an increasing EMI burden and FD investors can hope for better returns on new FDs, said The Economic Times report. The hike spells bad news for existing borrowers as banks and other financial institutions will soon start increasing interest rates on loans, which in turn means that the loan EMIs will also go up, the report added.
The short to medium term interest rates are likely to rise first. As far as long-term interest rates are concerned, it will take a little longer for these rates to go up significantly.
RBI Governor Shaktikanta Das said the decision was taken in view of rising inflation, geo-political tensions, high crude oil prices and shortage of commodities globally, which have impacted Indian economy.
As per the Governor’s statement, “Based on this assessment of the macroeconomic situation and the outlook, the MPC voted unanimously to increase the policy repo rate by 40 basis points to 4.40 per cent, with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent. The MPC also decided unanimously to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.”
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Global spillover
The RBI cautioned that the economy faces global spillover risks from geopolitical tensions, elevated commodity prices and moderating external demand. “The decision today to raise repo rate may be seen as reversal of rate action of May 2020. Last month, we had set out a stance of withdrawal of accommodation. Today’s action needs to be seen in line with that action,” Mr Das said.
“I would like to emphasise that the monetary policy action is aimed at containing inflation spike and re-anchoring inflation expectation,” he said, adding that “high inflation is known as detrimental to growth”.
Food inflation to remain high
In his address, the RBI Governor noted that food Inflation is expected to remain high as spillovers from global wheat shortages are impacting domestic wheat prices, even though domestic supplies remain comfortable. Due to the Russia-Ukraine war, edible oil prices may firm up as major producing countries have imposed export restrictions, he said.
Also read: RBI needs to tailor actions in tune with dynamic global situation: Das
Retail inflation hit nearly 7 per cent in March and held above the upper end of the RBI’s target band of 2-4 per cent for the third month in a row.
The RBI move also comes ahead of a widely-expected 50 basis points hike by US Federal Reserve later on Wednesday.
