RBI Monetary Policy: If Urjit Patel hikes repo rate, your home, personal, vehicle loan EMIs to soar, here’s how

RBI governor Urjit Patel along with Monetary Policy Committee (MPC) will be announcing India's fourth bi-monthly monetary policy for fiscal year FY19. The MPC will provide policy stance, repo rate, CPI inflation outlook and its view on global economy and markets. The MPC members have been meeting for the last two days, and today they will be presenting their decision at around 14:30 hours. Majority of experts believe that once again RBI will hike policy repo rate, which is currently at 6.50%. The last time this policy repo rate was seen in April 2016 policy. 

Vivek Ranjan Misra and Jayasree Ram, analysts at Karvy Stock Broking, said, "If the Reserve Bank wants to maintain a constant real policy (nominal –CPI) rate, it would need to deliver 2 to 3 rate hikes of 25 bps each. We expect another rate hike of 25 bps on 5th October, 2018 while not ruling out even a 50 bps increase.”

Experts at Bank of Baroda say, “While yields fell because of reduction in government borrowing (Rs 200bn below est.) in H2 and OMOs of Rs 360bn for Oct’18, the macro backdrop suggests yields are likely to move higher than lower. With INR falling by 5.6% and oil up by 14% since last policy, we expect RBI to hike rate by 25bps on 5 Oct 2018.” 

This means RBI can hike rate either by 25 basis point or even scare the market by 50 basis points. If this the case, India’s next policy rate can be 6.75% or 7% which would be at three-year high. 

If RBI does hike rate in today's policy, this can turn out to be a negative factor for your EMIs on home, personal and vehicle loans. 

Each lending and deposit rate decided by any bank has a direct relationship with policy repo rate. 

When banks borrow funds from the central bank during shortages, they are currently paying a higher interest rate, which is 6.50%. This was not the case 2 policy meets ago as they just paid 6%, which was till June, 2018. So, now with a 50 basis points hike borrowing from RBI becomes costly for banks. Further rate hike would make it even more expensive for banks in borrowing from RBI. 

Repo is referred to as repurchase option, which comes as a contract provided by a bank to RBI for availing overnight loans by giving eligible securities like Treasury Bills with a commitment that they will purchase the security back at a predetermined price. Hence, the interest rate charged on this repo transaction is called repo rate. 

However, the higher repo rate may not have an immediate impact on banks and hence your loan - banks usually opt for loan from RBI after analysing their liquidity position and cost of funds before increasing the deposit rates and lending rates. 

If there is a need of funds, then banks will begin by passing their repo rate burden on you by raising lending rates. It needs to be noted that, home loans and other floating rate loans are the ones which get highly impacted when RBI hikes repo rate. 

Banking system liquidity in the last 3 weeks has been in deficit with the current level being at Rs 40,531crs as on Sep 28’ 2018. 

As discussed, if banks get impacted by borrowing from RBI at higher repo rate, this discourages them from availing short-term loans and advances from the apex bank. 

Therefore, due to non-availability of low cost funds banks will have no other option but to hike lending rates for customer in order to pass the burden. 

Such will in return decrease the consumer purchasing power. 

The impact of this 6.50% repo rate is already more painful for new loan borrowers, as the existing one can continue to pay their EMIs on the existing lending rates.  Another hike, is just adding more tension to your EMIs, as banks will be in hay way. 

What basically RBI does is increase the repo rate, makes it costly for lender to borrow money, which in return will slow down investments and then as an aftermath will result in downward trend in liquidity in the economy. Although the growth of economy gets impacted at certain level, but this definitely helps in taking inflation down.