RBI hikes repo rate by 50 bps to 5.90%; home, car loans to be impacted

Reserve Bank of India has increased the repo rate or prime lending rate by 50 basis points to 5.90 per cent, RBI Governor Shaktikanta Das said while announcing the decisions of the Monetary Policy Committee (MPC). The central bank had hiked repo rate four times since May to the recent 5.90 per cent. The recent revision in repo rate has been made to keep inflation levels within the target.

MPC decided to hike the repo rate by a majority of five out of six. While announcing the hike in repo rate, Das noted that the decision was not only prompted by the urgency to control inflation levels but also due to the adverse action by global central banks, especially that of the advanced countries. 

Das underlined, "The world has witnessed two major shocks– COVID-19 pandemic and the Ukraine conflict. Now, we are in the midst of a third major shock arising from monetary tightening and aggressive communications from advanced countries’ central banks." He further announced the RBI's withdrawal from its accomodative stance, adding the economy has remained resilient despite high inflation and apprehensions of a global recession. 

This revision comes as analysts predicted a 50 bps hike in repo rate due to global situations. IIFL Founder and Chairman Nirmal Jain told Global Business Editor at Business Today TV Udayan Mukherjee earlier this week that short-term lending rate or repo rate may go up by 50 basis points yet again as the RBI has raised repo rate by 140 basis points since May.  

A recent Business Today poll showed that the majority of respondents expected the central bank to go for a 50 basis points hike. Respondents across platforms like Twitter (72.5 per cent), LinkedIn (57 per cent), YouTube (58 per cent) and Instagram (29 per cent) said a 50 bps hike was likely whereas others expect it to increase by 25-35 bps. Few respondents did not anticipate any hike at all. 

With a hike in repo rate, EMIs for home, car and personal loans are also likely to go up. Home, car and personal loans will become more expensive as the cost of borrowing will go up for banks, leading to a rise in lending rates. 

Commenting on what people can do after the recent repo rate hike, Adhil Shetty, CEO of Bankbazaar.com told Business Today, "At a time like this, it is advisable to pre-pay in any shape and form to control your interest outflow. You could cut down non-essential expenses to save money for pre-payments. With pre-payment, borrowers may feel the pinch in the short term but they will be better off once the rate cycle reverses."

Shetty added, "If you took a home loan at 7% for 20 years, your per lakh interest is ₹86,071. Your per lakh EMI is ₹775. If your rate goes to 8.9% after 3 months, you had 237 EMIs left but now it could theoretically go to 410 months assuming the same EMI. Assuming a bigger EMI, the tenor extension will be smaller. But at 410 months, your loan is 173 months or nearly 14.5 years longer. At this stage, if you made an immediate pre-payment 17 times your EMI, your tenor reduces to 236 months. Four pre-payments of 4.5 times EMI once every 12 months has roughly the same effect in reducing your tenor."

Moreover, Indian markets opened on a watchful note ahead of the Monetary Policy Committee (MPC) decision announcement by Shaktikanta Das. Sensex opened 0.28 per cent down at 56,251.19 whereas Nifty50 opened at 16,818.10. Indian Rupee, on the other hand, rose 14 paise to 81.59 against the US Dollar in early trade. 

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