RBI hikes rate to tame inflation

Reserve Bank of India Governor Shaktikanta Das said the decision to raise the policy repo rate to 4.9 per cent from 4.4 per cent, was aimed at curbing price increases and mitigating the impact of geopolitical tensions, like the war in Ukraine



Pedestrians walk past the Reserve Bank of India (RBI) signage at its headquarters in Mumbai on June 8, 2022. India's central bank hiked rates for a second time in as many months, as Asia's third-largest economy reels from galloping inflation in the wake of the Ukraine war. — AFP
Pedestrians walk past the Reserve Bank of India (RBI) signage at its headquarters in Mumbai on June 8, 2022. India's central bank hiked rates for a second time in as many months, as Asia's third-largest economy reels from galloping inflation in the wake of the Ukraine war. — AFP
by

Issac John

Published: Wed 8 Jun 2022, 6:42 PM

India’s central bank on Wednesday raised its key interest rate by 50 basis points on Wednesday, the second hike in the last three weeks, in a bid to cool persistently high inflation in Asia’s third-largest economy.

Reserve Bank of India Governor Shaktikanta Das said the decision to raise the policy repo rate to 4.9 per cent from 4.4 per cent, was aimed at curbing price increases and mitigating the impact of geopolitical tensions, like the war in Ukraine.

“Upside risks to inflation materialized earlier than expected,” Das said. Wednesday’s increase follows a 40 basis points rise in May.

The cost of funds for banks goes up when the repo rate is increased. This is because the repo rate is the rate at which banks borrow funds from the RBI. As a result, the cost of borrowing for retail and other borrowers goes up after the RBI hikes the repo rate.

The immediate impact of the repo rate hike is on the retail loans such as home, personal, and vehicle loans which are linked to the bank’s external benchmark. Most banks have linked their lending rates to the repo rate and, therefore, the impact is immediate for the borrowers.

When the repo rate goes up, the repo rate linked lending rate of banks also goes up. This means an increase in the home loan interest rate for the borrower. In practice, instead of increasing the EMI, in most cases, the tenure of the loan is increased by banks.

Reacting to the rate hike, the Indian stock markets’ key indices, Sensex and Nifty, closed in the red for the fourth straight day.

The 30 stock S&P BSE Sensex slumped 214.85 points or 0.39 per cent to 54,892.49 points against its previous day’s close at 55,107.34 points.

The Sensex touched a high of 55,423.97 points and a low of 54,683.30 points in the intra-day. The broader Nifty 50 of the National Stock Exchange slumped 60.10 points or 0.37 per cent to 16,356.25 points against its previous day’s close at 16,416.35 points.

The RBI raised its inflation projection for 2022-23 to 6.7 per cent from 5.7 per cent and kept its forecast for growth this year at 7.2 per cent.

The price spikes have impacted consumer spending, which accelerated to an eight-year high of nearly 7.8 per cent in April, according to official data.

India’s economy expanded at a 4.1 per cent annual pace in the January-March quarter, following 5.4 per cent growth in the previous quarter. Overall, the economy grew 8.7 per cent in the 2021-22 financial year, slower than the 8.9 per cent estimated by the government.

Rajan Bandelkar, president, Naredco, said the rate hike will impact the robust sales in the residential housing segment, although in the short term. “So far, the post-Covid recovery and the bullish sentiments were supported by the low interest rate to a great extent. The sector requires liquidity at lower cost to continue the growth momentum. It is expected that interest rates will be eased with the global supply chain returning to normalcy.”

Dr Niranjan Hiragana, vice chairman, Naredco, said taming steep inflation hike is a preordained measure by RBI, given the global economic ballgame. “It is evident that home loan interest rate hike will impair the home buying rally as payout in terms of EMI is scheduled to rise. The hike in the limit of individual loans by co-operative banks by 100 per cent is a welcome initiative for home buyers who opt for home loans from co-op banks,” said Hiranandani.

“Any increase in the interest rate will further impact the costs of doing business and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic. However there has been a fundamental change in buyers’ expectations and attitude towards homeownership and this will largely withstand marginal fluctuations in lending rates,” said Ramani Sastri, chairman & MD, Sterling Developers.

“The rate hike won’t have a significant impact as home loan interest rates have already gone down substantially in the recent past and buying decisions may not be altered by these marginal changes. The outlook for India looks positive with higher affordability and disposable income in the hands of new-age investors.,” said Lincoln Bennet Rodrigues, chairman and founder, The Bennet and Bernard Company.

— issacjohn@khaleejtimes.com


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