With India governor Shaktikanta Das announcing a 50-basis point (half a percentage point) increase in the repo rate, home loan EMIs are poised to climb for the second time in just over a month. The RBI's six-member monetary policy committee unanimously voted on Wednesday to boost the repo rate — the rate at which banks lend to each other – to 4.9 percent in an effort to keep inflation under control.
Because over 90% of bank home loans are tied to the repo rate, the RBI's action will automatically raise mortgage rates. The 20-year home loan will climb by Rs 3,029 with this increment, from Rs 77,530 to Rs 80,559.
When combined with the May 4 increase, consumers can expect a 90-basis point increase in 35 days or a total increase of Rs 5,500 per month on a loan of this type.
While deposit rates are projected to climb, the rate of increase would be slower because the banking system is still awash with economic stimulus, despite the fact that the excess cash has decreased 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 will not be the final rate hike by the RBI. Most analysts agree with Crisil's prediction that the RBI will raise rates by another 75 basis points this fiscal year.
This means that interest rates will be half a percentage point over the pre-pandemic level by the end of March. In explaining the rate hike, Das stated that the RBI now estimates inflation to be 6.7 percent in 2021-22, up from 5.7 percent in April.
Food costs, which have risen globally as a result of the situation in Ukraine, are responsible for 70% of the inflation, according to Das. In addition, India's average crude oil import price is now estimated to be $105, up from $100 previously. The protracted violence, according to Das, is putting a damper on global trade and the economy.
The good news is that, after two years of the epidemic, the RBI has been emboldened to employ powerful medicine to combat inflation. This is due to the recovery in the economy's health, which is gaining traction. Because of improved corporate balance, capacity utilization in the industry has improved from 72.2 percent in the third quarter of FY22 to 74.5 percent in the fourth quarter of FY22.
According to Das, capacity utilization in the industry has risen from 72.2 percent in the third quarter of FY22 to 74.5 percent in the fourth quarter of FY22, and is likely to increase further as company balance sheets strengthen. The typical monsoon is also predicted to boost the services sector and the rural economy. "The Indian economy has been resilient throughout these trying times, thanks to strong macroeconomic fundamentals and buffers." Despite the pandemic and the war, the recovery has accelerated. Inflation, on the other hand, has accelerated far above the upper tolerance limit," Das remarked.
After cleaning up balance sheets and reducing debt, the banking industry posted its greatest ever profits in FY22, indicating that the 'dual balance sheet crisis' that plagued the Indian economy prior to the pandemic is now over. Das, on the other hand, maintained his 7.2 percent GDP growth prediction. The lack of confidence that the RBI would remain accommodating was a shift from previous policies. The governor stated that they voted unanimously to remove the concession to keep inflation within the target.
