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RBI’s First Rate Hike In 4 years, What Becomes Costly?

RBI's off-cycle announcement is likely to make banks increase interest rates on loansThe Reserve Bank of India on Wednesday announced a hike in the repo rate by 40 basis points,…

RBI’s off-cycle announcement is likely to make banks increase interest rates on loans

The Reserve Bank of India on Wednesday announced a hike in the repo rate by 40 basis points, a first in almost four years.  The central bank’s surprise move comes as a measure to control the persistent high inflationary pressure.

The RBI has increased the repo rate upto 4.40 per cent from 4 per cent earlier while the cash reserve ratio (CRR) has been hiked by 50 basis points to 4.5 per cent. The decision was taken at a meeting of the monetary policy committee (MPC) with the central board, which was held on May 2-4.

Repo rate is the rate at which the RBI lends short-term funds to commercial banks. An increase in repo rate means borrowing becomes costlier for banks and this makes banks judicious in using their funds.  

The RBI’s off-cycle announcement is likely to make banks increase interest rates on loans. The EMIs for your home loans, auto loans and personal loans will increase. The commercial banks and NBFCs are going to increase the interest rates on new loans after the RBI’s announcement.

Those who are going to apply for loans may have to end up paying higher EMIs as the banks would charge higher interest rates for new loans. The existing borrowers, especially those who have opted for flexible interest rates, would end up paying higher EMIs after the RBI’s announcements.   

According to RBI governor Shaktikanta Das, the decision should be seen as part of the central bank’s announcement last month for the gradual withdrawal of easy money from circulation. The RBI governor also cited the geo-political tensions, high crude oil prices and shortage of commodities globally, which have impacted the Indian economy, as factors behind the rate hike.

The RBI has changed the key lending rate after two years. The repo rate was cut last time in May 2020 and it was kept unchanged since then. 

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