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In a major relief for the loan borrowers, the Reserve Bank of India today kept the repo rate unchanged at 6.5 percent. The bank added that it wouldn't hesitate to act in the future if the situation warranted. The general openion was that the RBI would hike the repo rate by 25 points due to the current inflation rates. This would have lead hike in loan rates by 0.25%. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
For those who have taken loans such as home loan, vehicle loan etc, this will come as a relief as the EMI will not be changing. It is expected that the rates amy ease out next year bringing down the interest rates
The main reason for the RBI to increase rates earlier was the high retail inflation, however, the retail inflation after falling below 6% in December 2022, went up again to 6.44% in February 2023. RBI would be expecting it to fall below 6%, the upper level of the RBI comfort zone, which may allow the central bank to extend the pause in the hike cycle in the near future. However, unless inflation subsides durably, the likelihood of another repo rate hike cannot be ruled out completely..
The central bank had raised rates by 250 basis points since May last year.
RBI Governor Shaktikanta Das said the central bank's policy stance remains focused on "withdrawal of accommodation", signalling it could consider further rate hikes if necessary. The pause in rate hikes is "for this meeting only", Shaktikanta Das said.
As banks raise interest rates, existing borrowers may experience a rise in EMIs even more, which will dampen their enthusiasm about becoming homeowners. The RBI rate hike affects all types of loans, including mortgages, vehicle loans, student loans, personal loans, business loans, credit cards and everything along the same line.
A rate increase of any size affects consumers because it makes borrowing money from commercial banks more expensive. Additionally, a higher cost of borrowing deters the average person from making pointless purchases, which lowers the consumption of goods and services. As a result of which, this enormously influences both the supply and demand chains.
A rise in the interest rates on bank deposits is typically a good thing whenever the repo rate rises. Experts claim that consumers who have short and medium-term investments, like fixed deposits and savings, might benefit from higher rates because they will receive higher returns from their investments based on how banking institutions accept the fresh interest rate increase.
The dissemination of the interest rate increase could, however, be a little slower. Additionally, it is anticipated that banks will eventually raise interest rates on deposits.
Investors in mutual funds, particularly those who invest in debt mutual funds, should exercise caution in light of the RBI's recent increase in the repo rate. Toughening interest rates can stifle investor confidence in the debt and stock markets.
Rate increases typically have an immediate effect on debt mutual funds, particularly long-duration bond funds. This is because bond prices decline as yield increases, which lowers the return on debt investments.
Due to this, debt investors are compelled to withdraw their funds from the martor to wait for the bond price to increase and increase their profits. Debt funds may therefore experience short to medium-term volatility.
For such individuals having savings and fixed deposits, higher rates are advantageous. Over the past few years, the RBI has increased rates a few times, including one unexpected increase of 140 basis points that brought the benchmark repo rate to 5.40%.
People are discouraged from making large purchases when borrowing costs rise, which reduces the demand for goods and services. This messes up the supply and demand chains, say experts.
With elevated borrowing costs and limited liquidity, fewer goods and services might be purchased negatively, affecting demands and requirements. Therefore, numerous goods and services might sea price increase and eventually become out of reach for the less fortunate sections of society.
The experts do, nevertheless, contend that as inflation begins to moderate in the medium term, the average person will benefit from increased consumption capacity.