RBI increases Repo Rate -What is the impact?

RBI increases Repo Rate -What is the impactRBI increases Repo Rate -What is the impact?

RBI Governor aggressive speech few days back about RBI future steps have gained momentum in stock market and rupee has been appreciating in the last 2 weeks. Yesterday, RBI Governor Mr. Raghuram Rajan shocked investors by increasing RBI Repo Rate by 25 basis points from 7.25% to 7.5%. This is to fight against the inflation. He calls them as Anti-Inflation measures. Rajan rolled back some of the liquidity tightening steps which was taken in July, 2013. This is Mr.Raghuram Rajan’s first RBI monitory policy in India.

What are the changes?

RBI Repo rate is the basis on what RBI lends to banks.

  • RBI Repo rate increased by 25 bps.
  • Minimum daily cash reserve ratio is reduced from 99% to 95%. This would reduce the cost of funding by banks.

Home loans – Fixed rate or floating rate – Which one should you prefer?

What would be the impact of RBI Repo rate increase?

  • While stock market tumbled by 1.8%, rupee fell by 0.81% and is currently at Rs 62.27 per dollar.
  • 10 year Govt. bond yield has increased by 39 bps to 8.58%.
  • Banks would raise loan interest rates for borrowers.
  • Banks are already charging high interest rates on housing loans (except for few like SBI etc.). Due to this increase in repo rate, banks would further increase home loan interest rates. Your existing home loan EMI would be increased. If you are planning to take new housing loan, your EMI would be higher.
  • Banks already gave indication that they would increase the interest rates on loans like Car loans. If you planning to buy a car, you need to pay high EMI now.
  • Personal loans come with premium with this move.
  • Builders have been betting good business during festive season ahead. There is no demand in real estate now in several cities and real estate prices are taking some correction. However due to increase in home loan interest, builders / real estate owners are forced to give discounts on their ventures.

How do major banks reacted on RBI repo rate increase?

Keki Mistry, Vice Chairman, HDFC Bank reacts and comments saying “long term interest rates may go up by 15-20 bps”. Banks are using MSF, banks cost of funds would reduce by 75 bps points".

Chanda Kochar, CEO, ICICI Bank reacts saying "these RBI key policy measures would help fighting against Inflation"

Conclusion: RBI Repo rate increase would impact us in some or other way. If you are planning to go for housing loan, going for floating rate home loan would be best option. For other loans, individuals need to re-think and take a decision at this point of time.

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RBI increases Repo Rate -What is the impact

Suresh KP

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