Home Loan Borrowers Get Ready For Higher Interest Rates Post-RBI's 2nd Repo Rate Hike
For the second time this year, the Reserve Bank of India (RBI) has raised the key interest rate by 50 basis points, which has propelled the repo rate to 4.9%. The earlier repo raise of 40-basis points was announced on May 4 this year. The latest decision of the country's central bank is going to have a cascading impact throughout the banking sector and that is a foregone conclusion.
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However, before we go into that in detail, let us understand this decision, which was put forth in the media by the Monetary Policy Committee head and RBI Governor Shaktikanta Das. RBI Hikes Repo Rate While announcing yet another hike in the key interest rate, RBI Governor Das appeared to be reassuring the nation as he said, "The repo rate still remains below its pre-pandemic level." However, would his words have the desirable effect on the banking sector or not, only time will tell but for now, Indians who have undertaken loans, especially housing loans, are definitely not going to react favorably as any upward change in the key interest rate means a direct hike in the interest rates of various banks, especially vis-à-vis home lending. For starters, the Consumer Price Index-based inflation has also increased to an 8-year high of 7.79% in April. Adding a spin to its decision regarding the repo rate, the MPC also proposed linking of credit cards to the instant real-time payment system, in order to expand the reach of the UPI system. Some other highlights of Wednesday's announcement of RBI are – 1) The Standing Deposit Facility rate will be 4.65% while the Marginal Standing Facility rate rests at 5.15%. 2) The revised inflation projection for India would be 6.7% in FY23. 3) The GDP growth projection for FY23 remains steadfast at 7.2%. 4) The RBI has now allowed the State Cooperative Banks and District Central Co-operative Banks (DCCBs) to finance commercial real estate including residential housing. This decision has been taken keeping in view the burgeoning need for affordable housing in the country. Loans To Get Costlier Let's start with what Saugata Bhattacharya, Axis Bank Chief Economist has to say following RBI MPC's announcement, "Everybody should be prepared to face the increase in their home loan rates." Why that would be the case? The answer lies in the fact that whenever repo rate is hiked, the cost of funds for banks also goes up proportionally. The reason behind this is that repo rate is the rate at which the RBI lends funds to various banks in India. This hike will trickle down to the retail borrowers as well, in no time. Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC, explains how, "Lending rates have already moved up as most loans today are linked to benchmarks like Repo rate. We should expect the RBI to continue with the rate hikes in the remaining MPC meetings in 2022." He has some more bad news for home loan borrowers, "We expect the RBI to hike the repo rate to close to 6% by 2023." After the previous hike in repo rate during May 2022, several banks have already increased their lending rates on home loans, in case of both existing and new borrowers. Close after, many NBFCs and Housing Finance companies have taken similar decisions regarding their respective lending rates. Besides, the overall market sentiment will also take a dip because investors will feel less daring after the RBI's announcement. However, that is something, which will unravel itself over a period of time. For now, costlier home loans are closer home for the borrowers, especially those belonging to the lower middle class and middle class sections of the society. (The author is an ex-banker with 20plus years of experience in lending and finance.)
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However, before we go into that in detail, let us understand this decision, which was put forth in the media by the Monetary Policy Committee head and RBI Governor Shaktikanta Das. RBI Hikes Repo Rate While announcing yet another hike in the key interest rate, RBI Governor Das appeared to be reassuring the nation as he said, "The repo rate still remains below its pre-pandemic level." However, would his words have the desirable effect on the banking sector or not, only time will tell but for now, Indians who have undertaken loans, especially housing loans, are definitely not going to react favorably as any upward change in the key interest rate means a direct hike in the interest rates of various banks, especially vis-à-vis home lending. For starters, the Consumer Price Index-based inflation has also increased to an 8-year high of 7.79% in April. Adding a spin to its decision regarding the repo rate, the MPC also proposed linking of credit cards to the instant real-time payment system, in order to expand the reach of the UPI system. Some other highlights of Wednesday's announcement of RBI are – 1) The Standing Deposit Facility rate will be 4.65% while the Marginal Standing Facility rate rests at 5.15%. 2) The revised inflation projection for India would be 6.7% in FY23. 3) The GDP growth projection for FY23 remains steadfast at 7.2%. 4) The RBI has now allowed the State Cooperative Banks and District Central Co-operative Banks (DCCBs) to finance commercial real estate including residential housing. This decision has been taken keeping in view the burgeoning need for affordable housing in the country. Loans To Get Costlier Let's start with what Saugata Bhattacharya, Axis Bank Chief Economist has to say following RBI MPC's announcement, "Everybody should be prepared to face the increase in their home loan rates." Why that would be the case? The answer lies in the fact that whenever repo rate is hiked, the cost of funds for banks also goes up proportionally. The reason behind this is that repo rate is the rate at which the RBI lends funds to various banks in India. This hike will trickle down to the retail borrowers as well, in no time. Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC, explains how, "Lending rates have already moved up as most loans today are linked to benchmarks like Repo rate. We should expect the RBI to continue with the rate hikes in the remaining MPC meetings in 2022." He has some more bad news for home loan borrowers, "We expect the RBI to hike the repo rate to close to 6% by 2023." After the previous hike in repo rate during May 2022, several banks have already increased their lending rates on home loans, in case of both existing and new borrowers. Close after, many NBFCs and Housing Finance companies have taken similar decisions regarding their respective lending rates. Besides, the overall market sentiment will also take a dip because investors will feel less daring after the RBI's announcement. However, that is something, which will unravel itself over a period of time. For now, costlier home loans are closer home for the borrowers, especially those belonging to the lower middle class and middle class sections of the society. (The author is an ex-banker with 20plus years of experience in lending and finance.)