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Loan EMIs will Rise as the RBI raises Interest Rates Again

Repo rates, which were raised by 50 bps to 5.40 percent, are now 25 basis points more than before the pandemic.

Mumbai: After the RBI increased the benchmark interest rate by 50 basis points on Friday, the third consecutive increase since May, to lower persistently high inflation, home, auto, and other loan EMIs are expected to increase further.

New loans on the repo-linked benchmark would be affected by the rate increase beginning with the next due date for equated monthly installments (EMIs). Loans linked to an internal benchmark, the marginal cost of funds-based lending rate (MCLR), will take a little longer to reprice. Banks base retail and small business loans on external rates, whereas most corporate loans are tied to their MCLRs. With Friday’s increase, interest rates have risen by 140 basis points since May.

The 50 basis point (bps) increase in lending or repurchase rates (repo) to 5.40 percent is 25 basis points higher than the pre-pandemic repo level. Shaktikanta Das, Governor of the Reserve Bank of India (RBI), indicated that the second consecutive half-point hike was not the end of the rate tightening regime and that more may be forthcoming to tame inflation, which has remained above the 6% comfort zone for the past six months.

Despite indications of a global slowdown, recessionary conditions in developed economies, and commodity price moderation, the central bank did not revise its existing economic growth or inflation forecast. “Inflationary pressures are broad-based, and core inflation remains elevated. Inflation is projected to remain above the upper tolerance level of 6 percent through the first three quarters of 2022-23, entailing the risk of destabilizing inflation expectations and triggering second-round effects,” Das said.

On the other hand, bankers said they see no downward trend in loan demand, whether retail or corporate. According to a senior private sector banker, loan growth has been robust, and customers are not delaying borrowing plans because interest rates have been raised. He said customers were expecting rates to rise from the decadal lows seen during the pandemic.

Shanti Ekambaram, whole-time director-designate at Kotak Mahindra Bank, stated in an interview on August 2 that the bank’s demand was unaffected by the rate hikes. According to Ekambaram, any purchase postponement is usually due to property prices, jobs, and transfers rather than interest rates.

Retail loans totaled 35.2 trillion as of June 17, up 18.1 percent from the previous year. According to RBI data, housing loans, a subset of total retail loans, increased 15% yearly to $17.4 trillion.

The financial sector is well capitalized and sound, and foreign exchange reserves, supplemented by net forward assets, protect against global spillovers. “Our umbrella is still standing,” he said. According to Ranen Banerjee, Leader, Economic Advisory Services, PwC India, the US Fed will be less aggressive in future rate increases because some economic effects have already been felt.

“The increase in the repo rates will take some time to transmit to actual lending rates and therefore impact on growth momentum in the current financial year is going to be limited and hence a real GDP growth of around 7 per cent should be achievable,” Banerjee said.