RBI Increases Repo Rate: Here's How It Will Impact You
The central bank hiked repo rate by 50 basis points to 5.4 per cent
The Reserve Bank of India (RBI) on Friday hiked the repo rate, the key lending rate, by 50 basis points to 5.4 per cent. Consequently, the standing deposit facility (SDF) rate is adjusted to 5.15 per cent and the marginal standing facility (MSF) rate and the bank rate to 5.65 per cent. This hike takes the repo rate above pre-pandemic levels of 5.15 per cent.
Repo is the rate at which the central bank lends short-term funds to banks. Changes in this rate typically get transmitted to the broader banking system.
"With inflation expected to remain above elevated levels, the monetary policy committee (MPC) judged that further calibrated withdrawal of monetary accommodation is warranted to keep inflation expectations anchored and contain the second-round effects. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth," said Shaktikanta Das, RBI governor.
"The MPC decisions have been in line with our expectations. Given the increasing external sector imbalances and global uncertainties the need for frontloaded action was imperative. We continue to see a 5.75 per cent repo rate by December 2022," said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.
This move will have significant impact on different sectors:
From the real estate sector's perspective, this upward revision will impact the sentiments of homebuyers, who have remained positive despite the hike in the property prices due to the consecutive rate hikes and other factors such as increased stamp duty and rising construction costs.
Domestic economic activities remain resilient despite the challenging global financial and geopolitical environment, leading to the withdrawal of the accommodative stance by the RBI.
"With respect to the rising repo rate, several banks have already begun rising home loan rates and this trend is expected to continue. Over the last year, the housing sector has seen a recovery in demand across segments, and the higher home loan rates could dent homebuyers' sentiments, especially in the affordable to mid category. However, we do not see a significant impact on the high-end and luxury segments due to the higher home loan rates," said Ramesh Nair, CEO, India and MD, market development, Asia, Colliers.
Real estate continues to be a good bet for investment with sustainable consumption demand at play even after the interest rate cycle wanes off.
"As the home loan borrowing is at the flexible rate, short term interest rate spike will certainly hurt the homebuyers' sentiments, but it averages out the cost positively in the long term. Developers are conscious about the inflationary pressure building up with the spiraling economic discord and will chalk out deal sweeteners on the back of festive tailwinds.Industry recommends the continuation of two thong approaches in the way of fiscal as well as monetary intervention to contain the consequential impact due to the global upheavals," said Dr Niranjan Hiranandani, national vice chairman- Naredco & MD- Hiranandani Group.
The increased repo rates by 50 bps will lead to the strengthening of interest rates and increase borrowing costs for MSMEs. Inflation not only increases input costs for MSMEs, it also makes these businesses unable to transfer the entire charge to consumers, thereby reducing margins for MSMEs.
"Control of inflationary expectations is of paramount importance as inflation is a double edged sword for MSMEs. Increase in prices leads to a reduction in demand. RBI has maintained its earlier growth and inflation forecast at 7.2 per cent and 6.7 per cent respectively, which is a good sign. Right now, we are getting good news about crude prices coming down to pre-Ukraine war levels and the Rupee strengthening a bit over the past few days, which will further reduce the inflation and input costs for businesses," said Ritesh Jain, co-founder of Flexiloans.com.
The volatility in global financial markets, soaring inflation and rupee depreciation have resulted in fighting times for the Indian economy. Although CPI has eased down from the April-highs, inflationary pressures still persist.
This upward revision will dampen the spirit of buyers looking to invest in consumer durables. Overall, the repo rate hike will impact consumer durables, the housing segment and the banking sector.