INDIA. Mumbai: The Reserve Bank India (RBI) increased the repo rate by 50 basis points (bps) to 4.90% while announcing its third monetary policy, noting that inflation is likely to remain above the 6 percent mark for the first three quarters of the current financial year, on Wednesday.
“Similarly, the Standing Deposit Facility (SDF) rate was hiked to 4.65% and the Marginal Standing Facility at 5.15%, as recommended by the RBI’s Monetary Policy Committee (MPC),” RBI Governor Shaktikanta Das said.
RBI had slashed the repo rate in March 2020, intending to cushion the impact of Covid-induced lockdown and maintain the status quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.
The Repo rate is the interest rate at which the RBI lends money to commercial banks in the event of any shortfall of funds. It is used by monetary authorities to control inflation. The Reverse Repo rate is the interest rate that the RBI pays commercial banks when they park their excess cash with it.
However, according to experts, the hike in repo rate will automatically increase the interest rate charged by banks and other financial institutions on different types of loans. For example, if a home loan of Rs 20 lakh is obtained for 30 years at .7.1 % interest and if the interest rate is hiked up to 8 %, then the Equated Monthly Instalment(EMI) will shoot up to Rs 14675 as against existing Rs. 13441 (a hike of Rs. 1234).
In the case of a car loan, if a loan of Rs. 10 lakh has been obtained for 5 years duration at 7.45 % interest and if the interest is hiked up to 8.35 %, the EMI will increase up to Rs. 20444 as against existing Rs. 20014 (a hike of Rs 430). As for personal loans, the rate of interest is expected to shoot up to 7.95 % from the existing 7.05 %. As such the EMI for Rs 10 lakh loan for 10 years’ duration will increase up to Rs. 12106 as against existing Rs. 11637 (a hike of Rs. 469).
RBI Governor Shaktikanta Das said that the members of the RBI’s MPC voted unanimously to hike rates and to continue the withdrawal of the accommodative stance. MPC noted that inflation is likely to remain above the 6 percent mark.
The decision was made to keep inflation from spiralling out of control. The MPC has maintained its ‘accommodative’ policy stance while working on removing accommodation to ensure that inflation remains within target while also boosting growth.
The inflation trajectory will depend on the tense geopolitical situation, elevated commodity prices, and elevated fuel prices with risks of further pass-through to domestic pump prices and further input and output price pressures. CPI inflation projection has been revised to 6.7% for Financial Year 2022-2023 against 5.7% earlier. It will be Quarter 1 at 7.5%, Quarter Q2 at 7.4%, Quarter Q3 at 6.2%, and Quarter 4 at 5.8%, with risks evenly balanced.
The recovery in domestic economic activity is gathering strength. Rural consumption is likely to benefit from a normal monsoon, and a rebound in contact-intensive services will likely bolster urban consumption.
Spillovers from elevated commodity prices, continued supply bottlenecks, and tightening global financial conditions nevertheless weigh on the outlook. Considering various factors, the real GDP growth for the Financial year 2022-2023 is retained at 7.2%, with Q1 at 16.2%, Q2 at 6.2%, Q3 at 4.1%, and Q4 at 4.0%, with risks broadly balanced, the RBI statement said.
Due to an increase in house costs since the last revision and after taking into account customer needs, the RBI is raising the existing limitations on individual housing loans by cooperative banks.
These limits were last revised for Urban Cooperative Banks (UCBs) in 2011 and Rural Cooperative Banks (RCBs) in 2009. The limits for tier-I/ tier-II UCBs stand revised from Rs 0.30 crore to Rs 0.60 crore and Rs 0.70 crore to Rs 1.40 crore, respectively.
“The limitations for rural co-operative banks have been raised from Rs 20 lakh to Rs 50 lakh for RCBs having an assessed net worth of less than Rs 100 crore, and from Rs 0.30 crore to Rs 0.75 crore for other RCBs.”
“Within the existing aggregate housing finance ceiling of 5% of total assets, it has been determined to allow RCBs (state cooperative banks and district central banks) to lend finance to commercial real estate – residential housing. This decision has been taken given the growing need for affordable housing and to realize their potential in providing credit facilities to the housing sector,” RBI said.
The inflation projection has been revised for the Financial year 2022-2023 to 6.7 % from 5.7% earlier. Starting with RuPay credit cards, credit cards can now be linked to UPI. E-mandate on cards for recurring payments, limit upped from Rs 5,000 to Rs 15,000 per transaction. The digital rupee will be introduced this fiscal year. RBI will wait for government papers on cryptocurrencies.
In case you missed it (ICYMI): The customers are no longer required to give OTP for auto-transactions of up to Rs 15,000. The RBI took this decision after it received requests from several stakeholders to increase the limit under the framework to facilitate payments of larger value like subscriptions, insurance premiums, and education fees, among others.