Home Loans Interest Rates, Fixed Deposits Interest Rates To Go Up As RBI Hikes Rates

Fixed deposit interest rates were already being increased by most banks and with today's hike in repo rates by 40 basis points, expect home loans to get costlier. Apart from this, interest rates on auto loans, gold loans, personal loans are also set to go up as RBI today increased the interest rates.

What generally happens is that banks borrow from the RBI. Yesterday, there were borrowing at 4%, but, beginning immediately banks will now have to borrow at 4.4% from the RBI, after the hike in repo rates. Since, their cost of borrowing increases, they will increas the cost for borrowers on home loans, personal loans, gold loans etc, making loans for individuals costlier. Apart from this, the hike in CRR was also push borrowing costs higher for banks.

However, there is good news for deposits holders as bank deposits may fetch you a higher interest rate than before.

What was the reasons for the RBI to hike interest rates?

One of the prime reasons for the RBI to hike interest rates was that inflation was increasing at an alarming levels.

"Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries. International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects," the RBI has said.

Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines. Renewed lockdowns and supply chain disruptions due to resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer. All these factors impart significant upside risks to the inflation trajectory set out in the April statement of the MPC.

Sandeep Bagla,CEO,Trust Mutual Fund says," Finally, RBI has woken up to inflationary expectations and hiked rates by 40 bps to take the effective corridor to 4.15% - 4.65%. Market participants should expect at least 35 bp hike in June as well. In spite of the hikes, the monetary policy still remains accommodotary. It is like saying that your salary has been increased, but you still remain underpaid. The implication is the rates need to be hiked far more than current levels. While RBI actions are most welcome from a financial stability perspective, inflation will stay high for months to come.

CRR has been hiked as well reducing liquidity in the system. One can expect the US Fed to increase rates and providing guidance on the pace and quantity of reduction in its gargantuan balance sheet. It is likely to be a tough market for all asset markets. Indian bonds could trade later in range of 8-8.50%."

It will be interesting to see what the RBI does when the MPC meets in June and whether there would be another hike. The trajectory of interest rates movement would be interesting to watch.

Rajiv Shastri, Director and CEO, NJ AMC "Over recent days, inflation has shown an upward trend which was caused by supply disruptions in food, oil and other commodities. However, the impact of these has now moved to the entire economy which resulted in core inflation being sustained at high levels as well. This rate hike is an attempt to control this secondary inflation which can become sticky and persist even after commodity prices moderate. It's a preventive measure and not a reactive one."