Impact of RBI's repo rate hike on borrowers, investors and the economy

In an unscheduled press briefing yesterday, RBI Governor Shaktikanta Das has said that the Monetary Policy Committee’s off-cycle meet had unanimously voted to hike rates.
The rationale behind this decision was the upside risks posed by global factors to India’s inflation trajectory.

The repo rate now stands at 4.40 per cent, with immediate effect. Consequently, the standing deposit facility rate stands adjusted to 4.15 per cent. Meanwhile, the marginal standing facility rate and the Bank Rate stand adjusted to 4.65 per cent .

However, the Monetary Policy Committee has decided to remain accommodative while focusing on the withdrawal of accommodation. This is aimed at ensuring that inflation remains within the target going forward, while supporting growth.

Driven by food inflation, the headline inflation number in March had touched 7 per cent. And, high frequency price indicators for April have indicated that food price pressures would persist. At the same time, the direct impact of the increases in domestic pump prices is feeding into core inflation prints and is expected to have intensified in April.
 
Effective from the fortnight beginning 21st May, the RBI has also hiked the cash reserve ratio by 50 basis points, to 4.5 per cent of net demand and time liabilities. This is expected to withdraw liquidity to the tune of Rs 87,000 crore from the system.
 
So, how is it going to impact homebuyers? Analysts say, this is the beginning of the end of low-interest home loans.
According to ANAROCK Group Chairman Anuj Puri, for home buyers, this hike signals an imminent end to the all-time low-interest regime. Low interest has been one of the major drivers behind home sales across the country since the pandemic began. The rise in interest rates will ultimately impact overall acquisition cost for homebuyers and may dampen residential sales to some extent.

In fact, the policy decision will impact all loans – from home loans and car loans to personal loans.
Let’s say you are planning to take a loan. You should act quickly to ensure that the loan is disbursed at the present lower rates. However, this applies to fixed rate loans such as personal loans and auto loans. This won't be of much help for new home loan borrowers because those are mostly floating rate loans.  
 
And, fixed deposit rates are set to rise. Ideally now, a depositor should consider locking funds in shorter-duration FDs in order to enjoy the benefit of higher interest rates in the coming months.
 
We spoke to Madan Sabnavis, chief economist at Bank of Baroda, to understand its impact on economic recovery, inflation and cost of credit.
 
Sabnavis said exogenous shocks will not be mitigated and this rate hike will control excess demand pressures. While Bank of Baroda forecasts inflation in the 6%-plus band, Sabnavis says inflation could go up to 7% and cost of credit is also  likely to go up.

For the financial markets, it is now evident that the central bank has finally embarked on policy normalisation process.