The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday announced a 50 basis point hike in the repo rate – the rate at which the RBI lends money to commercial banks – to 4 .9% according to forecasts. The latest increase in the key rate follows a surprise 40 basis point hike on May 4, as global central banks line up aggressive measures to fight inflation without hurting economic growth.
Experts expect lenders to follow the RBI action with higher home loans and lower fixed deposit rates.
The RBI has also allowed co-operative banks to provide loans for residential projects, in a move widely expected to ease some of the pressure from the rising cost of funds for developers.
What is the impact of the repo rate on deposit and lending rates?
The repo rate is the policy rate that determines the interest rates offered by commercial banks to borrowers and depositors. A higher lending rate forces banks to pass on the increased cost of borrowing to their customers, and vice versa.
Where to expect the repo rate in the coming months?
A year from now, the policy rate is expected to be 50 to 100 basis points higher in markets and mandates given high inflation and the resulting policy tightening, senior economist Upasna Bhardwaj told CNBCTV18.com. head of Kotak Mahindra Bank.
So where can you expect interest rates for fixed income securities and home loan rates?
Any increase in the repo rate could lead to lower interest rates applicable to savings and time deposits and, on the other hand, make mortgages and car loans more expensive.
According to Sanctum Wealth’s Manish Jeloka, the quantum of changes in fixed income and mortgage rates should go hand in hand with RBI rate hikes.
“These assumptions pose downside risk given the impact of recent government trade measures on local prices. Any easing of supply chain issues will also put downward pressure on inflation and remove the need high rate hikes,” he told CNBCTV18.com. .
Samantak Das, chief economist at JLL India, believes the impact of rising rates on home loan EMIs is unlikely to be significant.
“These loans are of longer tenor. Banks and housing finance companies have only partially passed on the previous hike in key rates,” he said.
Where are FD and home loan rates now, and where can they go?
For example, currently when the repo rate is 4.4%, the State Bank of India (SBI) – India’s largest lender by assets – has interest rates between 2.9 and 5.8% for fixed or term deposits with a maximum duration of five years.
|Target score||Term loan interest rate|
|New Credit/No Score||7.25|
ICICI Bank, HDFC Bank and Kotak Mahindra Bank offer home loans of Rs 50 lakh to salaried or self-employed customers at 7-7.85%.
Jeloka expects term deposit interest rates with major lenders to be between 6 and 6.75% by the end of the year, and mortgage rates at 7-7, 5%.
First post: STI