The Reserve Bank of India (RBI) today raised the repo rate for the first time in the last four years. The repo rate has been increased by 40 basis points. In addition, the cash reserve ratio (CRR) has been increased by 50 basis points.
The RBI said it raised the repo rate to curb inflation. Some market experts say interest rates are usually raised to keep inflation in check. But when the RBI suddenly raises interest rates, commercial banks may also have to raise their lending rates on a marginal cost basis.
According to economists, the decision will force people to buy only what they absolutely need. Lack of easy access to credit will reduce the tendency of ordinary people to buy luxury goods. In such a scenario, if the demand decreases, the price may also decrease. This comes when inflation has been rising to an 18-month high amidst a rebound in domestic economic activity. “From a real estate point of view, this hike in policy rate is not welcome and will have a negative impact as home loan rates will increase immediately,” says Samantak Das, Chief Economist, and Head Research and REIS, India, JLL. Let’s go into the finer details of this announcement and its impact on the borrowers and depositors.
Two critical messages from the RBI are
- after the ebbing of Omicron worries, pent-up demand recovery is getting widespread and
- the demand recovery will likely aggravate the inflation scenario, which touched 7% on 21 March
Core inflation has averaged 6% in recent months. The RBI has enumerated several factors for the higher-than-expected inflation, most of which were known beforehand.
As members of the central bank’s economic policy-making committee broadly reached this consensus, the RBI announced the decision to increase the repo rate. But the stock market received the news negatively. The Sensex, which was down 600 points before Governor Shaktikanta Das’ press briefing, fell sharply after the rate hike was announced and ended 1,307 points, or 2.29%, down at 55,669. The Nifty took a beating, too, and broke all its crucial support levels to end around the lows of March, down 392 points, or 2.29%, at 16,678. Investors lost Rs 6.1 lakh crore of wealth in a single day as the BSE market capitalisation fell to Rs 259.73 lakh crore against Rs 265.88 lakh crore in the previous session.
Interest rate-sensitive realty, auto and bank stocks today fell sharply after the Reserve Bank hiked its key interest rate by 40 basis points (bps) in an unexpected move to tame rising inflation. From the realty pack, DLF tanked 5.28%, Indiabulls Real Estate declined 5.05%, Sunteck Realty went lower by 4.61%, Godrej Properties fell 4.33%, Sobha (3.82% ), Oberoi Realty (3.37%) and Brigade Enterprises (2.24% ) on the BSE.
The BSE realty index declined by 3.31% to 3,418.45. Among auto counters, Ashok Leyland plunged 4.44% , Bajaj Auto tanked 3.54% , TVS Motor (3.31%), Maruti (3.17%), Hero MotoCorp (3.08%), M&M (2.70%) and Tata Motors (2.11%). The auto index fell by 2.53% to 24,280.80. Among bank stocks, Bank of Baroda tumbled 4.12%, IndusInd Bank dipped 3.98% , HDFC Bank (3.34%), Bandhan Bank (3.33%), AU Small Finance Bank (3.22%), ICICI Bank (2.31%), State Bank of India (2.27%) and Federal Bank (0.05%). The BSE bank index declined 2.29% to 40,583.54. The 30-share BSE benchmark Sensex tumbled 1,306.96 points or 2.29% to settle at 55,669.03. During the day, it plummeted 1,474.39 points or 2.58% to 55,501.60.
The repo rate is the rate at which the central bank lends to commercial banks. According to experts, the increase in the repo rate will result in higher interest rates for commercial banks. Banks are sure to be passed on to the public. Given the average lifestyle of the middle class these days, their purchasing power will reduce as they clear higher equated monthly instalments (EMI) every month, repaying for goods they had bought on credit. The general public will have to pay higher interest rates for loans too.
According to experts, interest rates may be raised for cars and homes. Experts say interest rates on personal loans are less likely to rise.
Similarly, an increase in CRR may increase the burden on the public interest. The CRR is the amount of money that commercial banks have to deposit as accessible reserve cash. As a result of the increase in the RBI CRR, banks will have to set aside more idle money. Even then, banks may raise interest rates to keep more money in their hands.
This means that the amount of cash deposited compulsorily by commercial banks with the RBI has increased. Commercial banks now need to increase control over lending.
Veteran banker Uday Kotak called the RBI “courageous”. “It was pretty clear that the wolf of inflation is getting more entrenched. There was a clear need to move. The RBI was courageous to do it in between policies and during market hours,” he said. In a surprise move today, May 4, the RBI increased the policy repo rate by 40 bps to 4.40% with immediate effect. Consequently, the standing facility rate stands adjusted to 4.15% and the marginal standing facility rate and bank rate stand at 4.65%. The central bank also hiked the cash reserve ratio (CRR) by 50 bps to 4.5%. This will lead to excess liquidity being pulled out of the system, bankers said.