Your Loan EMIs May Shoot Up Even As RBI Keeps Repo Rate Unchanged

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    Defying market expectations, the Reserve Bank of India in its October 5 monetary policy outcome kept the repo rates on hold at 6.5%. Repurchase or repo rate is the rate at which RBI lends money to banks for their various short term funding requirements. In the current FY, repo or key policy rate has been hiked twice consecutively in the bi-monthly monetary policy meet of RBI in June and August by 25 basis points each. But the monetary policy stance from here on has been changed from neutral to calibrated tightening i.e. any cut in interest rates is off the table for now.

    Your Loan EMIs May Shoot Up Even As RBI Keeps Repo Rate Unchanged
     

    This simply means loan borrowers will not see their equated monthly installments or EMIs on various retail loans such as home, personal or car loan decrease anytime soon. In fact, even before the policy outcome banks in view of the liquidity constraints and pick-up in credit growth have been increasing interest rates.

    Giving a rationale to the status-quo decision, Urjit Patel, RBI governor said, "Please recall, that we had two rate hikes in the space of two months (June 7 and August 2 monetary policy announcements) and today's stance of calibrated tightening essentially means that in this rate cycle, rate cut is off the table and we are not bound to increase rates at every meeting because that is not required given our inflation outlook and forecast at this point of time."

    As new data comes in, we would look into changing our policies accordingly. Calibrated tightening is an appropriate stance given the forecasts and financial conditions, he added.

    Patel in the post-policy conference said the decade-long accommodation by central banks globally is tapering off and emerging markets are facing headwinds from rising crude oil prices.

    Just after the RBI's announcement, State Bank of India increased its MCLR or marginal cost of funds based lending rate by 5 basis points or 0.05% across maturities up to 3 years. Last month, the bank raised interest rates by 20 basis points or 0.20%. The recent hike in interest rate by the bank post RBI's announcement is the fourth hike this year. SBI's 1-year MCLR is pegged at 8.5% which is generally the rate charged for auto and home loans. Other banks too may follow suit with SBI being the leader.

     

    Last week taking into account the liquidity situation, PNB increased rates by 0.20% while ICICI Bank increased rates by 0.1% with rates ranging between 8.90-9.0%. The new rates have come into force from October 1.

    So, with the change in policy stance to 'calibrated tightening' and a threat to inflation due to uncertainty around fiscal slippage and minimum support price (MSP) impact, loan borrowers for now may expect no signs of their EMIs going down.

    Goodreturns.in

    Read more about: repo rate mpc loan emi
    Story first published: Saturday, October 6, 2018, 12:33 [IST]
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