Concerned about rising inflation, the Reserve Bank of India (RBI) has increased the repo rate by 0.50%. With this the repo rate has increased from 5.40% to 5.90%. That is, everything from home loans to auto and personal loans can be expensive and you will have to pay more EMI.
The meeting of the Monetary Policy Committee was going on since September 28 to decide on interest rates. RBI Governor Shaktikanta Das announced the increase in interest rates in a press conference. Earlier in the meeting held in August, interest rates were increased from 4.90% to 5.40%.
1.90% increases in last 4 time
The monetary policy meeting is held every two months. The first meeting of this financial year was held in April. Then RBI kept the repo rate constant at 4%. But the RBI called an emergency meeting on May 2 and 3 and increased the repo rate by 0.40% to 4.40%.
This change was made in the repo rate after 22 May 2020. After this, in the meeting held on June 6 to 8, the repo rate was increased by 0.50%. This increased the repo rate from 4.40% to 4.90%. Then in August it was increased by 0.50%, which reached 5.40%. Now the interest rates have gone up to 5.90%.
What did the RBI governor say?
- The whole world is going through a crisis
- turmoil in the stock market around the world
- 5 out of 6 MPC members in favor of raising interest rates
- Inflation a matter of concern for all sectors
- SDF increased from 5.15 to 5.65%
- Demand will be better in Q2 of FY23
- MSF increased from 5.65 to 6.15%
- Lower oil prices will reduce costs
- India’s GDP growth is still the best
- adequate liquidity in the market
- Increase in government spending will improve liquidity
- Due to the strength of the US dollar, pressure on the world’s currency
- The economic condition of the country is good even in the challenging environment
- Inflation rises due to supply worries
- Retail inflation above target, so the decision to increase rates
- GDP growth likely to be 7% in FY23
How much difference will a 0.50% rate hike make?
Suppose a person named Rohit has taken a house loan of Rs.30 lakh for 20 years at the rate of 7.55%. His loan EMI is Rs 24,260. In 20 years, he will have to pay an interest of Rs 28,22,304 at this rate. That is, he will have to pay a total of Rs 58,22,304 instead of 30 lakhs.
One month after Rohit took the loan, RBI increases the repo rate by 0.50%. For this reason, banks also increase the interest rate by 0.50%. Now when a friend of Rohit comes to the same bank to take a loan, the bank tells him 8.05% rate of interest instead of 7.55%.
Rohit’s friend also takes a loan of Rs 30 lakh only for 20 years, but his EMI comes to Rs 25,187. That is, Rs 927 more than Rohit’s EMI. Because of this Rohit’s friend will have to pay a total of Rs 60,44,793 in 20 years. This is 2,22,489 more than Rohit’s amount.
Will EMI increase on already running loans?
There are 2 types of home loan interest rates first fixed and second flexible. In fixed, the interest rate of your loan remains the same from beginning to end. There is no change in the repo rate on this. On the other hand, the change in the repo rate also affects the interest rate of your loan when you take a flexible interest rate. In such a situation, if you have already taken a loan at a flexible interest rate, then the EMI of your loan will also increase.
Why does RBI increase or decrease the repo rate?
RBI has a powerful tool to fight inflation in the form of repo rate. When inflation is very high, RBI tries to reduce the money flow in the economy by increasing the repo rate. If the repo rate is higher, then the loan to the banks from the RBI will be expensive. In return, banks will make loans costlier for their customers. This will reduce the money flow in the economy. If money flow is less, then demand will decrease and inflation will decrease.
Similarly, when the economy goes through a bad phase, there is a need to increase the money flow for recovery. In such a situation, RBI reduces the repo rate. Due to this, the loan from RBI becomes cheaper to the banks and the customers also get the loan at a cheaper rate. Let us understand with this example. When economic activity came to a standstill during the Corona period, there was a decrease in demand. In such a situation, the RBI had increased the money flow in the economy by reducing the interest rates.
What happens when the reverse repo rate goes up or down?
Reverse repo rate is the rate at which RBI pays interest to banks on holding money. When RBI has to reduce the liquidity from the market, it increases the reverse repo rate. Banks take advantage of this by receiving interest for their holdings with the RBI. During high inflation in the economy, RBI increases the reverse repo rate. This reduces the funds with the banks to give loans to the customers.