Reserve Bank Of India Raises Repo Rate By 50 Basis Points In Fourth Consecutive Rate Hike This Year
After three back to back repo rate hikes in May, June and August, the RBI today hiked the policy repo rate for the fourth time in a row. Repo rate hike is expected to pinch your pocket more due to higher loan interest rates and increase in loan EMIs, however bank FD rates too, are likely to further rise.
After three back-to-back repo rate hikes in May, June and August, the RBI today hiked the policy repo rate for the fourth time in a row. In line with the market expectations, the repo rate has been hiked by 50 basis points, with immediate effect.
The policy repo rate now stands at 5.90% The central bank has raised the repo rate by a cumulative 190 basis points since May 2022, through a surprise 40 bps hike in May, then three back-to-back 50 bps rate hikes in scheduled MPC meetings of June, August and September.
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For the uninitiated, repo rate is the rate at which the RBI lends money to commercial banks, whenever the latter falls short of funds or needs liquidity. The banks borrow from the RBI against qualifying securities put as collateral, such as government bonds and treasury bills. Simply put, just like we borrow from banks at the applicable interest rates on loans, banks borrow from the RBI whenever required, at the repo rate.
How The Rate Hike Will Impact Your Pocket
Loan EMIs To Pinch More
The previous hattrick of repo rate hikes had already resulted in banks hiking their lending rate for car loans, home loans etc. Consequently, a borrower¡¯s loan EMIs too climbed up and pinched the pocket even more. The loan EMIs are expected to climb further after this hike.
If you are someone who is planning on taking a loan, then it may be better to do it soon if you are financially ready for the same, as these back-to-back repo rate hikes amid inflationary pressure are expected to keep making the EMIs climb up in near future as well.
As far as existing loan borrowers are concerned, their current EMI would not likely change immediately and is likely to change on the loan reset date when the lender reviews the lending rate of your loan.
Bank FD Rates To Rise
In good news for bank FD investors, the previous three repo rate hikes had begun to result in bank FD rates climbing up. And this fourth repo rate hike is expected to make the FD rates further go up.
Rationale Behind The Rate Hike
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RBI governor explained the MPC¡¯s rationale for its decisions on the policy rate. His statement mentioned that the global economic outlook continues to be bleak. Financial conditions are tightening and recession fears are mounting. Inflation continues to persist at alarmingly high levels across jurisdictions. The enduring effects of the pandemic and the geo-political conflict are manifesting in demand-supply mismatches of goods and services.
Against this backdrop, the MPC decided to increase the policy repo rate and remain focused on the withdrawal of accommodation, while supporting growth. The Monetary Policy Committee (MPC) met on 28th, 29th and 30th of September 2022.
Three Shocks To The Economy
The RBI governor Shaktikanta Das¡¯ statement today also mentioned the three shocks to the economy. ¡°In the last two and half years, the world has witnessed two major shocks ¨C the COVID-19 pandemic and the conflict in Ukraine. These shocks have produced profound impact on the global economy.¡±
¡°As if that was not enough, now we are in the midst of a third major shock ¨C a storm ¨C arising from aggressive monetary policy actions and even more aggressive communication from Advanced Economy (AE) central banks. The necessity of such actions is driven by their domestic considerations, but in a highly integrated global financial system, they inevitably cause negative externalities through global spillovers. The recent sharp rate hikes and forward guidance about further big rate hikes have caused tightening of financial conditions, extreme volatility and risk aversion. All segments of the financial market including equity, bond and currency markets are in turmoil across countries. There is nervousness in financial markets with potential consequences for the real economy and financial stability. The global economy is in the eye of a new storm. ¡°
He also said that despite this unsettling global environment, the Indian economy continues to be resilient. There is macroeconomic stability. The financial system remains intact, with improved performance parameters. The country has withstood the shocks from COVID-19 and the conflict in Ukraine. Our journey over the last two and half years, and our steely resolve in dealing with the various challenges give us the confidence to deal with the new storm that we are confronted with.
Also Read: How To Make The Most Out Of Your Bank FD
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