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, Jun 06, 2018 15:30 hrs
RBI (Reuters image)

The Central Bank has revised interest rates, after its six-member monetary policy meeting on Wednesday.

The macro-economic, trade, currency, and soaring global crude prices had led most to speculate an interest rate hike. There were also others who said that the RBI may adopt a neutral stance, considering the rising GDP numbers.

The RBI MPC however flummoxed most of the speculators contending with a 0.25% rate hike and calling it a neutral stance.

The official release of the Central Bank reads, "On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25%."

The latest hike throws a major question to most readers and watchers of the economy- '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 heavily 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.

In the previous Bi-Monthly Monetary Policy statement announced in April, the MPC had kept the repo rate and reverse repo rate unchanged at 6% and 5.75% respectively. The last rate hike was announced by RBI in January 2014 when the repo rate was increased to 8 percent. Since then, RBI has either reduced the rate or maintained status quo. The rate hike in June looks at making loans all the more expensive, but on the positive side, there is a lot to cheer for holders of savings deposits.

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 takes a beating. 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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