Surprise Move! RBI Hikes Repo Rate After Nearly Four Years. Here's How It Will Impact Your Finances

In a surprise 2 pm media briefing today, the RBI governor announced that key policy rates have been hiked. This move comes after the RBI neither changed the key rates in last month's MPC meeting nor waited till next month's meeting to announce the hike.

This surprise hike has left the market bleeding, with Sensex nosediving below the 56,000 mark and Nifty closing below 16,700.

The last time the repo rate was changed was in May 2020, when a 40 bps rate cut was announced after a 75 bps rate cut in March 2020. Since May 2020, the repo rate has remained unchanged. The last repo rate hike was in August 2018.

As per the announcement made, the RBI has hiked the repo rate by 40 bps, making it climb up to 4.40% from 4% earlier. As per an ET report, the hike will come into effect immediately. Further, the Cash Reserve Ratio (CRR) has been hiked by 50 bps which will exert further upward pressure on interest rates.

It appears that borrowers should prepare for an increasing EMI burden and FD investors can hope for better returns on new FDs.

It's being believed widely that this surprise increase may be the start of an interest rate hike cycle.

Retail inflation in India, which is measured by the Consumer Price Index (CPI), for March 2022 has risen to 6.95%.

In April 2022 monetary policy, RBI had said that the primary focus is to ensure that inflation remains within the target going forward while supporting growth. The core mandate of the central bank is to manage retail inflation and ensure that it remains within the range of 2%-6%, as per the ET report.

PTI

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How It Will Impact You

With further possibilities in key policy rate hikes, here is what is the likely impact on bank FDs and loans, and what you as an investor and borrower, should do.

Impact On Bank FDs

Whenever the interest rate cycle makes a U-turn from the bottom, it is typically the short to medium term interest rates that are likely to rise first. As far as long-term interest rates are concerned, it will take a little longer for these rates to go up significantly, as per the ET report.

So, bank FD depositors should avoid locking deposits for the longer term at the prevalent lower rate and wait for the deposit rates to rise. If you are planning to book an FD now, it may be better to choose a shorter tenure so that you are not locked at a lower rate for long.

Impact On Loan Borrowers

The repo rate hike will soon begin to translate into higher lending rates for both existing as well as new borrowers, thus implying the onset of higher EMIs soon.

If you are planning on taking a loan, then you better do it soon, as the repo rate hike would lead to an eventual hike in loan interest rates soon, whether its external benchmark linked loans like repo rate linked loans, MCLR based loans or any other older regime based loans.

For existing borrowers, the EMI changes are likely to reflect on the loan reset date when the lender reviews the lending rate of your loan.

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