Repo rate hiked by 50 bps to tame inflation; EMIs may soar

MUMBAI: Home, auto and other loan EMIs are set to rise further after RBI raised the key interest rate by 50 basis points (bps), the third increase in a little over three months. Reserve Bank of India (RBI) Governor Shaktikanta Das signalled that this won’t be the end of rate tightening and more may come to cool the stubbornly high inflation that has for six months stayed above the comfort zone of 6 per cent.

As the home loan borrowing is at the flexible rate, short term interest rate spike will certainly hurt the homebuyers’ sentiments, but it averages out the cost positively in the long term Niranjan Hiranandani, National VC, Naredco

The increase in lending rate or the repurchase rate (repo) to 5.40 per cent is 25 bps higher than the pre-pandemic level. However, the central bank did not revise its existing economic growth or inflation forecast despite indications of a global slowdown, recessionary conditions in developed economies, and the moderation already witnessed in commodity prices.

“Inflationary pressures are broad-based and core inflation remains elevated. Inflation is projected to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second-round effects,” Das said.

Since May, the central bank has cumulatively raised interest rate by 140 bps. Despite this sharp hike, RBI has retained CPI inflation forecast at 6.7 per cent for current fiscal year. KE Raghunathan, national chairman, Association of Indian Entrepreneurs, pointed that this came at a time when the people in Tamil Nadu are already burdened with increase in property tax and milk price, proposed hike in power tariff.

“They are not taking into account the pains of the micro and small entrepreneurs or salaried persons in the current situation. This is not the time to play by the book; it is time to have empathy for the common man. It is impossible to bear the gap between expenses and earnings under the present circumstances,” he said.

Noting that prices of dollar-denominated items would go up, V Ravichandran, finance expert added that interest rate going up would lead to significant rise in costs, especially on food items.

They are not taking into account the pains of the micro and small entrepreneurs or salaried persons. It is impossible to bear the gap between expenses and earnings KE Raghunathan, Natl chairman, Association of Indian Entrepreneurs

With the inflation at an unacceptable 7 per cent, the monetary policy has to act and hence the repo rate has been hiked by 50 basis points (bps) to 5.40 per cent, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday.

Stating that there are signs that headline inflation, which has breached the 6 per cent upper threshold set for the RBI for six consecutive months, has peaked, Das on Friday said policy moves from here on will be “calibrated, measured and nimble” and will depend on unfolding dynamics.

The governor refused to spell out any guidance on the way forward, pointing out that we live in a dynamic world where things are changing very fast.

He also noted that generally, guidance in a rate hiking cycle is difficult as compared to that in a rate cut cycle.

“... inflation still remains at uncomfortably or unacceptably high levels and therefore, monetary policy has to act,” he told reporters after the central bank’s six-member rate setting panel decided to hike the repo rate at which it lends to the system by 0.50 per cent.

It can be noted that ahead of the policy announcement, many analysts had been of the view that the hike would be a calibrated 0.35 per cent while a few expected the RBI to frontload by being aggressive with a 0.50 per cent increase.

“Monetary policy will be calibrated, measured and nimble depending on the unfolding dynamics of inflation and economic activity. The focus will remain on ensuring safe and soft landing for the economy,” he added.

He said steps have to be taken to contain inflation and inflation expectations in the economy.

The Monetary Policy Committee (MPC) also took the growth aspect into consideration while taking its call, he added.

The governor also mentioned that as per the RBI’s assessment, Indian economy is an isle of macroeconomic and financial stability in a turbulent ocean right now, and has braved two black swan events of the pandemic and the Russian invasion of Ukraine.