When repo rate increases, it is more expensive for banks to borrow money, and they typically pass the cost on to borrowers in the form of higher interest rates
RBI MPC Meeting August 2023: The RBI Governor-headed six-member Monetary Policy Committee’s (MPC) meeting is scheduled on August 8-10. The policy decision will be announced on August 10 by Governor Shaktikanta Das. The borrowing cost, which started rising in May last year, has stabilised with the RBI keeping the repo rate unchanged at 6.5 per cent since February when it was raised from 6.25 per cent.
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Later, in the two bi-monthly policy reviews in April and June, the benchmark rate was retained.
The repo rate is the rate at which the RBI lends money to commercial banks. When the RBI repo rate increases, it becomes more expensive for banks to borrow money, and they typically pass this cost on to borrowers in the form of higher interest rates on loans. This, in turn, can lead to higher EMIs (equated monthly instalments) on loans.
The Reserve Bank is likely to continue with the pause on the key interest rate at its upcoming monetary policy review, as concerns on the inflation front and keeping the borrowing cost stable to maintain the economic growth momentum persist, said experts.
Will EMIs Go Up?
The impact of a repo rate hike on EMIs will depend on a number of factors, including the size of the hike, the base interest rate of the bank, and the term of the loan. However, in general, a repo rate hike will lead to an increase in EMIs.
A recent report by Anarock found that affordable home buyers have been paying almost 20% more in their EMIs over the last two years. The floating interest rates for home loans up to Rs 30 lakh have jumped up from 6.7% in mid-2021 to nearly 9.15% today.
What Experts Say?
Punjab & Sind Bank Managing Director Swarup Kumar Saha told news agency PTI that the RBI factors in many things, including global developments. So, it will also take into account interest rate hikes effected by many central banks like the US Fed recently. Due to interest rate increases, yields in the domestic markets have gone.
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“Looking at the overall situation, my guess is that the RBI would retain the repo rate at the present level. The interest rate is likely to be stable for the next 2-3 quarters if the global situation remains stable,” Saha said.
LIC Housing Finance Managing Director Tribhuwan Adhikari too said the central bank is unlikely to tinker with interest rates and maintain the status quo in the upcoming monetary policy review.
The interest rate is likely to remain stable in the near term, Adhikari said.
The government has tasked the central bank to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side. The central bank factors in the CPI to arrive at its bi-monthly monetary policy decision.
Indranil Pan, Chief Economist at Yes Bank, said that taking consideration of the domestic flare-up in vegetable prices led by tomato, there is likely to be no consideration from the MPC to make any alterations – both to the rate and stance.
The decision would also be based on the continued firmness in the macro data flows from the advanced economies that are likely leading to uncertainties on the rate hiking cycle in the AEs, especially the US, Pan said.
“India and US rate differential has fallen to historic low levels and may soon have its implications for flows. We would expect the RBI to sound a bit cautious and therefore hawkish in its communication. Expectations are for the RBI to move higher its own inflation projections for the remainder of the FY while keeping the growth estimates unchanged,” Pan said.
India’s retail inflation based on Consumer Price Index (CPI) rose to a three-month high of 4.81 per cent in June, mainly on account of hardening prices of food. The inflation, however, remains within the RBI’s comfort level of below 6 per cent. The inflation data for July will be released on August 14.
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The MPC consists of three external members and three officials of the RBI. The external members of the panel are Shashanka Bhide, Ashima Goyal and Jayanth R Varma. Besides Governor Das, the other RBI officials in MPC are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor).
