Home loan and car loan equated monthly installments are set to increase going ahead after the Reserve Bank of India announced the first interest rate hike in 24 months. The central bank also increased the CRR limit to suck out excess liquidity in the banking system. All the measures announced today will lead to an increase in the cost of funds, the analyst said.
Surprising everyone, the RBI on Wednesday, hiked the repo rate by 40 basis points(bps). The decision was taken in an off-cycle meeting by RBI’s Monetary Policy Committee earlier this week. The new repo rate now stands at 4.40 per cent. Notably, since May 2020 RBI had kept the repo rate unchanged at 4 per cent. This is also the first time since August 2018, that the repo rate has been hiked.
Governor Das said, “Based on this assessment of the macroeconomic situation and the outlook, the MPC voted unanimously to increase the policy repo rate by 40 basis points to 4.40 per cent, with immediate effect.”
“Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent. The MPC also decided unanimously to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth,” he added.
RBI’s decision comes at a time when most central banks globally are hiking interest rates to avoid stagflation. Repo Rate is the base rate at which central banks lend to commercial banks, in order to regulate liquidity in the market. It is also a measure to control inflation. The country’s retail inflation has risen to 6.95 percent, which is above the RBI’s tolerance level for the third month straight.
Apart from this, RBI has also hiked the cash reserve ratio (CRR) by 50 bps, in order to withdraw excess liquidity from the economy. The new CRR now stands at 4.5 per cent. A hike in CRR will lead to the withdrawal of Rs 87,000 crore and will be effective from midnight of May 21. Notably, a hike in the CRR will also mean a high EMI of loans. A high CRR lowers the liquidity in the banks, which in turn lowers the fundable available loans available in the banks.
Experts are of the view that this will have a direct impact on the EMIs of home loans and auto loans.
Anuj Puri, Chairman, Anarock Group said, “With inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the RBI took a tough unscheduled decision – to increase the repo rates by 40 bps, bringing them to 4.40%. Overall, this was expected, as inflation has definitely moved into the threatening zone. Unfortunately, for home buyers, this hike signals an imminent end to the all-time low-interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began.”
“This rise in interest rates will ultimately impact overall acquisition cost for homebuyers - and may dampen residential sales to some extent,” he added.
Major Banks Have Hiked Marginal Cost Of Lending Rate (MCLR)
Notably, last month the country’s major banks have already revised the marginal cost of the lending rate (MCLR) hiking it between 0.05 per cent to 0.1 per cent. State Bank of India (SBI), the country's largest lending bank, hiked the MCLR by 10 basis points or 0.1 per cent, whereas Bank of Baroda and Axis Bank increased MCLR by 5 basis points or 0.05 per cent, respectively. Kotak Mahindra Bank revised its MCLR by 5 basis points across all tenors.