July 29, 2011 / 10:43 AM / 9 years ago

RBI rate hike: Here's how it affects you

The RBI has continued its upward interest rate revision policy of the past one year by yet again hiking the interest rates by 50 basis points recently. The new repo rate is 8% and the corresponding reverse repo rate (1% lesser than repo rates) is 7%. This in effect will mean that things are going to be costlier on the borrowing front. Let us look at review document and understand what is in store for the common man due the new changes:

Indian passengers crowd at a railway station in the western Indian city of Ahmedabad February 24, 2006. REUTERS/Amit Dave/Files

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In the words of the central bank, the hike has been forced due to 2 major reasons:

1. A continued rise in the prices of non-food manufactured products and the rising Crude oil prices

2. There is also considerable indication that business growth is moderating. Meaning that higher growth rates a not seen in the coming few months.

Thus, the RBI has deemed it necessary to continue its anti-inflation policy and continue with raising interest rates.

Over the last one and a half year, the RBI has raised the Cash Reserve Ratio (CRR) by over 100 basis points and the Policy rate by over 275 basis points. This in effect means that banks have to face a net effect pressure of around 425 basis points.

This policy stance of the RBI in the past one year has meant that on an average, all banks/lenders have raised their deposit and Lending rates by over 225 basis points (2.25%). This means that loans have become costlier for you. Your housing loan, car loan, personal loan etc have all borne the blunt of this upward rise. Although it must also be seen that deposit rates have gone higher too, the extra income that you get will be compensated by the extra you have to shell out for gas, oil, soap, food and everything!

It is clear that the RBI is not keen on supporting growth without getting the necessary infrastructure in place. It is clear from all its recent communications that a major reason for inflation is the supply side inefficiency and it will do all that it can do on the monetary side to fight inflation tooth and nail and also manage/minimize the resulting negative effect on business growth.

The RBI is also committed to ensuring that not all these policies result in a very negative effect on the liquidity situation. How will this pan out in the coming days?

Loans will be costlier: A direct impact that can be felt in the coming few days is an inevitable rise in Interest rates charged by banks for their lending products including home loans and car loans.

Prices will mostly stagnate in the medium term: in the immediate short term, we may not see any major price changes in the day-to-day products we buy; in the medium-term, there will be a stagnation of prices due to the anti-inflation measures that have been implemented in the last 20 months.

Cars and Homes may be costlier: Already faced with many pressures due to external factors, these two industries will take a direct hit of the current hikes. On one hand, their borrowings will get costlier leading to pressure on margins, and on the other hand since banks will charge more for loans, they could see a hit on the sales side too.

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