From rate hike to inflation: Key takeaways from RBI’s Monetary Policy Committee meeting

Looks like inflation has finally hit the Reserve Bank of India (RBI).

In its first-rate hike since August 2018, the RBI on Wednesday raised the repo rate by 40 basis points (bps) to 4.40 per cent and the cash reserve ratio (CRR) by 50 basis points to 4.50 per cent.

Repo rate is the rate at which RBI lends to commercial banks. The ‘REPO’ means ‘Repurchasing Option’ or the 'Repurchasing Agreement'.

CRR is a percentage of a bank’s total deposits that it needs to maintain as liquid cash. The change in CRR will take out Rs 87,000 crore liquidity from the system, said the RBI Governor Shaktikanta Das.

The decision to change the rates was taken by the RBI Governor-headed Monetary Policy Committee (MPC) in an off-cycle meeting from May 2 to May 4.

Das said the decision was taken in view of rising global inflation, geo-political tensions, shortage of commodities and high crude oil prices.

Highlights of Monetary Policy announcement made by @RBI Governor @DasShaktikanta on May 4, 2022 #rbitoday #rbigovernor#rbikehtahai #RBIPolicy pic.twitter.com/h1JXXpyx1W

— RBI Says (@RBIsays) May 4, 2022

Here are the key takeaways from RBI's meeting and how it's going to affect the common man:

EMIs LIKELY TO GO UP

Every month installments (EMIs) are expected to rise after the RBI announced a repo rate hike by 40 basis points.

The EMI of a floating rate loan changes with changes in market interest rates. If market rates increase, the repayment increases. When rates fall, the dues also fall.

When the RBI hikes interest rate or the repo rate, loans for the customer will become expensive because of the hike in the interest rates by banks. This is because banks acquire funds from the RBI at higher prices, which forces them to increase their lending rates, reported the Mint.

FD INVESTORS TO BENEFIT

Increase in repo rate also means that fixed deposit (FD) rates are set to rise. A FD gives investors a higher rate of interest than a regular savings account, until the maturity date. With the increase in interest rates, the banks will now have to pass on the benefits to depositors too.

According to banking analysts, the FD rate will be re-priced following the RBI’s repo rate hike. “Depositors should consider locking funds in shorter-duration FDs to benefit from higher interest rates in the coming months,” a banker at a private bank told moneycontrol.com.

ICICI Bank hiked its marginal cost of funds-based lending rate (MCLR) by 40 basis points to 8.10 per cent hours after the RBI announced the hike in repo rate, reported Business Today.

REAL ESTATE, AUTO SECTOR TO TAKE HIT

Two years after the Covid pandemic started, real estate and automobiles sectors were finally showing some signs of recovery. But, the increase in interest rates are going to hit them badly because customers will delay buying new homes and cars.

Real estate developers fear home loan rates, currently between 6.6 and 6.9 per cent for top lenders, will rise, reported the Business Standard.

Auto sector would also feel the burden of the hike in auto loan rates. According to Mitul Shah, Head-Research at Reliance Securities, 50% of the passenger vehicles and 90-95% of the commercial vehicles are financed by loans, reported the New Indian Express.

'GEOPOLITICAL TENSIONS PUSHING INFLATION'

The RBI governor said that the adverse effects of the unprecedented high global food prices due to the war in Europe is reflected in the domestic market too.

"Geopolitical tensions have led to inflation rates reaching their highest levels in the last 3 to 4 decades in major economies. Global crude oil prices are ruling above USD 100 per barrel and remain volatile and global food prices touched a new record in March and have firmed up even further since then," said Das in a statement.

'INFLATION TO REMAIN HIGH'

The RBI has not tinkered with its inflation projection it announced in April this year. RBI had projected the retail inflation to be at 5.7 per cent in the current fiscal year.

In his address, the RBI Governor said that food inflation is expected to remain high as spillovers from global wheat shortages are impacting domestic wheat prices.

The retail inflation has remained above 6 per cent for the last three months.

"High frequency price indicators for April indicate the persistence of food price pressures. Simultaneously, the direct impact of the increases in domestic pump prices of petroleum products beginning the second fortnight of March is feeding into core inflation prints and is expected to have intensified in April," Das said.