Higher EMIs ahead as MPC hikes Repo rate

On the 8^th of Feb, the Monetary Policy Committee (MPC) of the Reserve Bank of India raised the Repo rate, the rate at which the RBI lends funds to banks, by 25 basis points to 6.50% in a bid to control retail inflation. According to experts, the RBI decision is expected to make all external benchmark linked (based on the Repo rate) loans more expensive with immediate effect. The RBI has also predicted a GDP growth for the next fiscal at 6.4% and retail inflation at 5.3% in FY24.

The hike in repo rate was pretty much expected says George Alexander Muthoot, MD, Muthoot Finance.

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“The RBI hiked repo rate by 25bps today and maintained its stance of ‘withdrawal of accommodation’, this was largely on expected lines and also in line with consensus expectations. The macro-economic challenges still continue and core inflation remains sticky. However, the resilience of the Indian economy, firming up of urban consumption demand and improving rural demand reinforce our optimism on the growth front and we expect steady demand for gold loans. Further, given the various measures announced in the Union Budget recently, including the rise in capex by 33 percent, demand is further expected to increase.

The macro-economic challenges still continue and core inflation remains sticky. However, the resilience of the Indian economy, firming up of urban consumption demand and improving rural demand reinforce our optimism on the growth front and we expect steady demand for gold loans

George Alexander Muthoot, MD, Muthoot Finance

“RBI measures to expand the scope of TReDS will improve the cash flows to MSMEs, this coupled with recent announcement in the budget towards the MSMEs will surely give support to MSME sector which were most impacted during the pandemic. We do believe that the large part of the RBI rate hike cycle is behind us, unless inflation flares up unexpectedly. Our borrowing cost may rise slightly going ahead but we are confident of maintaining our margins at the current levels.”

Siddhartha Sanyal, Chief Economist and Head Research, Bandhan Bank too says that the decision and the consensus were expected.

If inflation indeed continues to soften in line with the RBI’s current expectation, the MPC will likely feel more comfortable moving into a long pause in the next quarter

Siddhartha Sanyal, Chief Economist and Head Research, Bandhan Bank

“The MPC’s decision to hike the repo rate by another 25 basis points to 6.50% was in line with market expectation. It was a close call in the current round to choose between a pause and a 25 basis point hike, as reflected in the MPC voting pattern with two of the six member committee voting for a pause.

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“While the voting pattern turned more diverse than usual, it is clear that the MPC’s action will be more dependent on data – both domestic and global – in the coming months. The RBI will likely stay in search of more decisive signs of a sustained disinflation in the coming months. On the other hand, if inflation indeed continues to soften in line with the RBI’s current expectation, the MPC will likely feel more comfortable moving into a long pause in the next quarter.”

As a result of the hike by MPC, bank lending rates are expected to increase while the cost of funds likely goes up. This means EMIs on vehicles, home and personal loans will also increase.