Explained: Impact of RBI's repo rate hike on deposits, loans
- RBI MPC voted unanimously to hike the benchmark interest rate by 50 bps to 5.4%
- Banks will have to raise deposit rates in the short term
- New home, personal and vehicle loans will become expensive
With inflation running at a near-decade high and the rupee hitting record lows, the RBI, which only began increasing interest rates in May, is expected to announce subsequent hikes in future to catch up with its global peers.
The RBI has raised rates thrice so far in this cycle, first catching markets off guard with a 40 bps hike at an unscheduled meeting, then a 50 bps hike to 4.90% in June, followed by another 50 bps hike to 5.4% in August.
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Five ways in which the RBI repo rate hike will impact you:
Rise in deposit rates: Banks will have to raise deposit rates in the short term. Many banks have already increased interest rates on deposits after the RBI hiked the repo rate by 40 bps in May. Interest rates on deposits, including savings accounts, post office savings accounts and fixed deposits (FD) will most likely increase.
Costlier loans: The repo rate hike will force banks and non-banking finance companies to further increase repo-linked lending rates and minimum cost of funds-based lending rates. This is because the cost of funds for banks will rise with the repo rate hike. It will lead to a rise in equated monthly instalments (EMIs) for existing borrowers. Additionally, new home, personal and vehicle loans will also become expensive.
Decline in bond yields: Bond prices and interest rates have an inverse relationship. If rates go up, yields on old bonds fall. Long-term debt investors will have a tough time but investors who have opted for short-term debt funds might recover their money and can reinvest it.
Equity market: Higher interest rates can also impact a company’s growth as cash flow dries up. Due to lowered expectations of growth from a company investors will expect lower stock price appreciation. If more companies see a fall in their stock prices, this can affect the equity market.
Inflationary concerns: The projections indicate that inflation is expected to remain above the upper tolerance limit of 6% through the first three quarters of 2022-23, the MPC said in June. This signals further rate action from the RBI. Inflation is now projected at 6.7% in 2022-23, RBI Governor Shaktikanta Das had said.