RBI raises repo rate by 50 basis points to 5.90%; home and auto loans to be impacted

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The Reserve Bank of India has raised the repo rate or prime rate by 50 basis points to 5.90%, RBI Governor Shaktikanta Das said while announcing the decisions of the Monetary Policy Committee (MPC) . The central bank has raised the repo rate four times since May to recently hit 5.90%. The recent repo rate revision was made to keep inflation levels within target.

MPC decided to increase the repo rate by a majority of five out of six. While announcing the repo rate hike, Das noted that the decision was not only driven by the urgency to control inflation levels, but also due to unfavorable action by global central banks, particularly those advanced countries.

Das pointed out, “The world has witnessed two major shocks: the COVID-19 pandemic and the conflict in Ukraine. We are now in the midst of a third major shock resulting from monetary tightening and aggressive communications from central banks in advanced countries. He further announced the RBI’s withdrawal from its dovish stance, adding that the economy remained resilient despite high inflation and fears of a global recession.

The revision comes as analysts expected a 50 basis point hike in the repo rate due to the global situation. IIFL Founder and President Nirmal Jain told Global Business Editor at Today’s television Udayan Mukherjee earlier this week that the short-term lending rate or repo rate could rise another 50bps as the RBI raised the repo rate by 140bps since May.

A recent business today poll showed that the majority of respondents expected the central bank to hike 50 basis points. Respondents on platforms such as Twitter (72.5%), LinkedIn (57%), YouTube (58%) and Instagram (29%) said a 50 bps upside was likely, while others expect it to increase by 25 to 35 bps. Few respondents had anticipated any increase.

With a rise in the repo rate, EMIs for home, auto and personal loans are also likely to increase. Home, auto, and personal loans will become more expensive as the cost of borrowing increases for banks, leading to higher lending rates.

Commenting on what people can do after the recent repo rate hike, Adhil Shetty, CEO of Bankbazaar.com, told Business Today: “At a time like this, it is advisable to prepay in any form to control your interest outflows.You could reduce non-essential expenses to save money for prepayments.With prepayment, borrowers may feel the pinch in the short term, but they will be better off once that the interest rate cycle will be reversed.

Shetty added: “If you have taken a 7% home loan for 20 years, your interest per lakh is ₹86,071. Your EMI per lakh is ₹775. If your rate goes to 8.9% after 3 months , you had 237 EMIs left but now it could theoretically go to 410 months assuming the same EMI Assuming a larger EMI the term extension will be smaller But at 410 months your loan is 173 months or nearly 14.5 years longer.At this point, if you have made an immediate loan prepayment 17 times your EMI, your term is reduced to 236 months.Four prepayments of 4.5 times the EMI once every 12 months have about the same effect on reducing your duration.

Moreover, Indian markets opened on a vigilant note ahead of the announcement of the Monetary Policy Committee (MPC) decision by Shaktikanta Das. Sensex opened 0.28% lower at 56,251.19 while Nifty50 opened at 16,818.10. The Indian rupee, on the other hand, rose 14 paise to 81.59 against the US dollar in early trading.

Read also: RBI MPC meeting: Economists and analysts expect a rate hike of 50 bps

Also read: BREAKING: RBI lowers GDP growth projection to 7% for 2022-23

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