MUMBAI: Home loan EMIs are set to rise, with Reserve Bank of India governor Shaktikanta Das announcing an increase of 50 basis points (half a percentage point) in the repo rate — the second hike in just over a month. The RBI’s six-member monetary policy committee voted unanimously on Wednesday to raise the repo rate – the rate at which RBI lends to banks — to 4.9% in a bid to tame inflation.
The RBI’s action will automatically push up the cost of mortgages as over 90% of bank home loans are linked to the repo rate. With this increase, the EMI on a Rs 1 crore, 20-year home loan would rise by Rs 3,029 from Rs 77,530 to Rs 80,559. Taken together with the May 4 hike, consumers are looking at a 90 basis points increase in 35 days, a total increase of Rs 5,500 per month on such a loan.
While deposit rates will also rise, the increase is expected to be slower as the banking system is still flush with the pandemic stimulus, although the surplus cash has declined from Rs 7.4 lakh crore in April to Rs 5.5 lakh crore in May 2022.
The bad news for borrowers is that this is not the last of RBI’s rate increases. Crisil expects RBI to hike rates by another 75 basis points this fiscal year – a view echoed by most economists. This would mean that by the end of March, interest rates will be half a percentage point above the pre-pandemic level.
Explaining the rate hike, Das said RBI now expects inflation to be at 6.7% in 2021-22, against 5.7% forecast in its April policy. Das said that 70% of the inflation was because of food prices, which have risen globally following the conflict in Ukraine. Also, the average price at which India imports crude oil is now expected to be $105, against $100 earlier. Das said the ongoing conflict was turning out to be a dampener for global trade and growth.
The positive news is that the RBI has been emboldened to administer strong medicine to tackle prices because of the improvement in the health of the economy, which is gaining traction after two years of the pandemic. Capacity utilisation in industry has improved from 72.2% in the third quarter of FY22 to 74.5% in the fourth quarter of FY22 and is expected to go up further because of improved corporate balance sheets, said Das. Also, a pick-up is expected in the services sector and rural economy due to normal monsoon.
“During these difficult and challenging times, the Indian economy has remained resilient, supported by strong macroeconomic fundamentals and buffers. The recovery has gained momentum despite the pandemic and the war. On the other hand, inflation has steeply increased much beyond the upper tolerance level,” said Das.
The banking industry has reported its highest ever profits in FY22 after cleaning up balance sheets, and corporates have reduced debt, which means that the `twin balance sheet problem’ that plagued the Indian economy before the pandemic is now over.
Das, however, retained the GDP growth forecast at 7.2%. A departure from earlier policies was the absence of assurance that RBI would remain accommodative. The governor said the MPC unanimously voted for withdrawal of accommodation to ensure that inflation remains within target. The optimism regarding growth came from expectations of a normal monsoon and recovery in manufacturing and services. “A rebound in contact-intensive services is likely to bolster urban consumption, going forward. Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push, and strengthening bank credit,” Das said.
While the repo rate serves as the ceiling for money market rates, the floor is set by the SDF, or standing deposit facility which has also been raised by 50 basis points to 4.65%. The marginal standing facility, which is used to provide emergency funds to banks, is now available at 5.15%.