How the rising RBI repo rate will affect your money

The Indian central bank Reserve Bank of India (RBI) is expected to raise interest rates again. After a small jump of 40 basis points in May, RBI raised the interest rate another 50 basis points in its bid to fight inflation in August. According to a Reuters poll, there is broad consensus that the RBI will raise rates at the September 30 meeting. The repo rate is the rate at which the RBI lends short-term funds to banks.

The US Federal Reserve just made its third straight 75 basis point hike and showed no signs of slowing down.

Economic growth

According to Amit Gupta, MD, SAG Infotech, economic growth will be unintentionally affected by consecutive rate hikes over a short period, even if they are necessary to fight inflation.

“People will buy fewer and fewer goods and services because of this, which will affect demand. Growth is slowed down. As a result, goods and services are no longer affordable to poor segments of society. It gets more expensive for everything,” Gupta said.

Stagflation

Amit Gupta added that in a situation of stagnant growth, high unemployment and persistent inflation, economists call it stagflation. India could also face stagnation by the end of the next fiscal year if inflation and growth conditions do not improve.

Borrowing cost

Put simply, an increase in repo rates increases the cost of borrowing.

Subhash Goel, MD, Goel Ganga Developments said that following the statement made by the RBI, many banks have started raising interest rates on loan and deposit schemes. The RBI rate hike will also impact residential sales growth. Across the country, builders have also raised real estate prices in response to the continued rise in raw material costs.

“Increasing consumer demand and ability to pay will continue to be optimistic; low interest rates could undermine sales momentum as the housing market recovery continues at a slow pace,” Goel said.

When the repo rate increases, the cost of borrowing for banking institutions also increases, which is passed on to account holders in the form of higher interest rates on loans and deposits. When the repo rate increases, the cost of borrowing for banking institutions also increases, which is passed on to account holders in the form of higher interest rates on loans and deposits.

“Borrowing money from a bank therefore becomes more expensive, which slows investment and the money supply in the market. The real estate sector, which has seen a good recovery in sales due to low financing costs, could be affected by the rise in RBI rates,” said Suren Goyal, Partner at RPS Group.

Loan EMI

As banks raise interest rates, EMIs for current borrowers will rise even further, undermining the optimism of new homebuyers, he added.

“Even a small rate hike has an impact on consumers because it makes borrowing from commercial banks expensive. All kinds of loans like home loan, car loan, education loan, personal loan, business loan, credit cards, mortgages are done by rising repo rate. Also, an increase in the cost of borrowing discourages unnecessary spending by the common man, thereby reducing the demand for goods and services. This further disrupts demand and the supply chain,” said Ankit Aggarwal, MD, Devika Group.

Savings, fixed deposit rates

However, the increase in rates is beneficial for those consumers who have savings and term deposits, he added.

RBI has raised rates in three separate moves since May, one of them unanticipated, totaling 140 basis points and taking the key repo rate to 5.40%.

Meanwhile, the rupee, down almost 9% this year. A weaker currency is likely to make imports more expensive and keep inflation high for longer.

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