How RBI Hike In Repo Rates Affects Common People?

By Mr. Anup Mishra

Keep an eye on RBI, says investors, experts and traders. Should we be prepared to pay more every month on your home, auto and other loans? Since RBI has increased the repo rates 12 times in the last 18 months. Before discussion on this, I would like to be very clear on some basics.

What is a basis point?

A basis point is nothing but one-hundredth of a percentage point.

People who took home loans and car loans in the last 18 months would have been impacted much. The reason is Commercial banks Indusind Bank, Hdfc Bank, ICICI Bank, Axis Bank & Kotak Mahindra Bank will have to pay more if they want to borrow from RBI, but individual borrowers as well as corporations may not feel the impact of the rate hike immediately as banks are not in a hurry to raise their loan and deposit rates.

Over the last one and a half year, the RBI has raised the Cash Reserve Ratio (CRR) by over 100 basis points and the Policy rate by over 275 basis points. This in effect means that banks have to face a net effect pressure of around 425 basis points.

Take a scenario, a person took a home loan for 25 lakhs in EMI with commercial banks like Indusind Bank, Hdfc Bank, ICICI Bank, Axis Bank & Kotak Mahindra Bank on May 2011. The rate of interest when he took a loan is 10.25%. If RBI continues to increase the repo rates by 12 times in the next 18 months it will highly impact the person who took the loan. Same case would reflect, if a person buys a car worth Rs 5.2 Lakhs before a month.

Over 95% percentage of home loans is floating interest rate. The RBI appointed bankingombudsman has been receiving a number of complaints from borrowers on the mounting credit risks as a result of increasing interest rates.

Home loans are 2-3% are fixed rate loans today. Even though interest risk is managed by banks, the risk is ultimately forced on the customer in a rising interest rate scenario.

Floating rate loans pass on the interest rate risk from banks which are much better placed to manage it to borrowers and thus banks only substitute interest rate risk with potential credit risk.

If a decision on this comes through it will be for both own source funds and borrowed source funds of banks.

I took few surveys related to RBI Actions. Here Kannan (Manager- Accounts) in a Pvt Ltd Concern shared his views.

Continuous increase in inflation forced the RBI to continuously increase the lending rate/the repo rate as one of the anti-inflationary actions to be taken.

Consequently, the commercial banks and other money lenders will increase their rate of interest for the various types of common man loans.

At the end of the day the long tenure loan enjoyers particularly the people who taken housing will be affected.

Due to the inconsistent and soaring rate of interest the fixed income people will be the most affected.
The indirect decrease in their monthly income will result in their standard of living down-fall.

Taking effective measures to control the inflation and success of the same may result in decreased interest rates in future.

The RBI rate hike comes despite increasing criticism of RBI's hawkish policy. Analysts and experts have started questioning if this hike will have any bearing on inflation because of the upward revision in petrol prices. Many have also started questioning the efficacy of the series of the rate hikes for 12th time in 18 months.


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