Interest rates hiked for now, this is how the RBI MPC's lending rate announcements will affect loans, EMIs, and savings deposits

Last Updated: Wed, Aug 01, 2018 15:38 hrs
RBI (Reuters image)

The Central Bank in its latest August 2018 announcement has opted to hike key interest rates, with five of its six-member monetary policy committee voting for the hike in a meeting on Wednesday.

The macro-economic, trade, currency, and soaring global crude prices had led most to speculate an interest rate hike.

Emerging markets investor Mark Mobius had reportedly quipped that the RBI should resist from hiking interest hikes. But, there were many analysts who had said a 0.25% rate hike was on the cards.

This was owing to rise in crude prices, strengthening of the US greenback and majorly retaining foreign investors.

Citing inflationary concerns, the MPC raised repo rates by 0.25% to 6.50%.

Reverse repo rate has also been hiked by 25 basis points to 6.25%. The regulator has retained a "neutral" stance.

Must Read: The full version of the MPC Outlook and Risks

The RBI had opted for a similar hike when the MPC assembled during June 2018.

For most readers and economy gazers the pertinent question is- How does an RBI rate announcement affect me?

The periodical exercise from the RBI gathers a lot of discussion. While a section of people and media praise it, there is ample criticism as well. And if you thought that rate-announcements were meant only for the economists or the corporate sitting in comfy chairs, then, you are sadly mistaken.

The RBI's rate-announcements have a major bearing on how people spend and the overall economy.

The price of goods such as cars and properties and services such as loans depends on the RBI's policy announcements.

Understanding Repo Rate and CRR:

The rate at which the Reserve Bank of India lends money to commercial banks is known as repo rate while the reverse repo rate is the rate at which the central bank of borrows money from commercial banks within the country. Besides these two terms there is also the cash reserve ratio or CRR, a portion of bank deposits that all commercial banks have to deposit with the RBI.

What happens when rates are cut:

There is a popular perception that a rate-cut may reduce interest rates and therefore loans may be available at a cheaper price. But in reality, a rate-cut dissuades people from saving their hard-earned money in bank deposits.

A rate-cut is usually taken as a good news for people already paying EMIs for a loan or are taking a loan. There is a belief that banks would channelise the benefits of lower interest rates to customers. But this depends on a number of factors such as the nature of the bank or financial intermediary, the period of the loan, and also the other terms of finance.

A cut in rates usually results in inflation. There is an abundant supply of money, with the rates of bank deposits coming down. With more people willing to spend more money, the costs of even the essential goods also rises.

Understanding rate-hikes

A rate-hike on the other end, promises to increase the savings for depositors. An increase in repo rates and reverse rates is usually good news for depositors as this prompts banks to hike the deposit rates.

While a rate-hike usually attempts at containing inflation, and government's borrowing and private credit demands and requirements. Home, Car and Personal loans usually become expensive after a rate-hike.

Besides these, the rate-announcements also leave an impact on the valuation of the rupee vis-a-vis other currencies such as the Dollar, Yen, Euro. It also impacts investor sentiments, and macro-economic conditions.

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