Concerned about rising inflation, the Reserve Bank of India has increased the repo rate by 0.50%. With this, the repo rate has increased from 4.90% to 5.40%. That is, everything from home loans to auto and personal loans is going to be expensive and you will have to pay more EMI.
After this hike, the interest rates reached the level of August 2019. The meeting of the Monetary Policy Committee was going on since August 3 to decide on interest rates. RBI Governor Shaktikanta Das gave information about increasing interest rates in a press conference on Friday.
What did the RBI governor say?
The decision to increase the repo rate by 0.50%
FY23 real GDP growth forecast remains at 7.2%
Edible oil prices fall due to increased supply
Inflation rate likely to be 6.7% in FY23
The current account deficit is not a cause for concern
Effect of inflation on the Indian economy
Global inflation is a matter of concern
MSF increased from 5.15% to 5.65%
Focus on withdrawing accommodative stand in MPC meeting
Inflation is down compared to April
Urban demand is showing improvement
Banks' credit growth up 14% annually
Improvement in rural demand is possible due to better monsoon
How much difference will a 0.50% rate hike make?
Suppose a person named Rohit has taken a house loan of Rs.30 lakh for 20 years at the rate of 7.55%. His loan EMI is Rs 24,260. In 20 years, he will have to pay an interest of Rs 28,22,304 at this rate. That is, he will have to pay a total of Rs 58,22,304 instead of 30 lakhs.
One month after taking Rohit's loan, RBI increases the repo rate by 0.50%. For this reason, banks also increase the interest rate by 0.50%. Now when a friend of Rohit comes to the same bank to take a loan, the bank tells him an 8.05% rate of interest instead of 7.55%.
Rohit's friend also takes a loan of Rs 30 lakh only for 20 years, but his EMI comes to Rs 25,187. That is, Rs 927 more than Rohit's EMI. Because of this Rohit's friend will have to pay a total of Rs 60,44,793 in 20 years. This is 2,22,489 more than Rohit's amount.
Will EMI increase on already running loans?
There are 2 types of home loan interest rates first floater and second flexible. In floater, the interest rate of your loan remains the same from beginning to end. There is no change in the repo rate on this. On the other hand, the change in the repo rate also affects the interest rate of your loan when you take a flexible interest rate. In such a situation, if you have already taken a loan at a flexible interest rate, then the EMI of your loan will also increase.
The rate has increased three times this year
The monetary policy meeting is held every two months. The first meeting of this financial year was held in April. Then RBI kept the repo rate constant at 4%. But the RBI called an emergency meeting on May 2 and 3 and increased the repo rate by 0.40% to 4.40%. This change was made in the repo rate after 22 May 2020. The first meeting of this financial year was held on 6-8 April. After this, in the monetary policy meeting held from June 6 to 8, the repo rate has been increased by 0.50%. Due to this the repo rate was increased from 4.40% to 4.90%. Now in August, it has increased by 0.50%, which has reached 5.40%.
Why does RBI increase or decrease the repo rate?
RBI has a powerful tool to fight inflation in the form of a repo rate. When inflation is very high, RBI tries to reduce the money flow in the economy by increasing the repo rate. If the repo rate is higher, then the loan to the banks from the RBI will be expensive. In return, banks will make loans costlier for their customers. This will reduce the money flow in the economy. If money flow is less, then demand will decrease and inflation will decrease.
Similarly, when the economy goes through a bad phase, there is a need to increase the money flow for recovery. In such a situation, RBI reduces the repo rate. Due to this, the loan from RBI becomes cheaper for the banks and the customers also get the loan at a cheaper rate. Let us understand this example. When economic activity came to a standstill during the Corona period, there was a decrease in demand. In such a situation, the RBI increased the money flow in the economy by reducing the interest rates.
What happens when the reverse repo rate goes up or down?
The reverse repo rate is the rate at which RBI pays interest to banks on holding money. When RBI has to reduce the liquidity from the market, it increases the reverse repo rate. Banks take advantage of this by receiving interest for their holdings with the RBI. During high inflation in the economy, RBI increases the reverse repo rate. This reduces the funds with the banks to give loans to the customers.
Price rise far beyond tolerance level
During the June policy, the RBI governor had said that the price rise is far beyond the tolerance level. However, he had recently said in a statement that inflation would moderate in the second half of the financial year. Das had said, at present, the outlook for supply looks very good. All the indicators are indicating the recovery of the economy in the second half of 2022-23.
Know what the inflation figures say?
1. India's Retail Inflation in June at 7.01%
According to government data released early last month, India's retail inflation stood at 7.01% in June. It was 6.26% in the same period a year ago. This was the sixth consecutive month that inflation remained above the central bank's tolerance band of 2%-6%.
2. Food inflation stood at 7.75%
Food inflation stood at 7.75% in June as against 7.97% in May. It was 8.38% in April. Inflation in vegetables declined to 17.37% in June from 18.26% in May. Fuel and light inflation rose to 10.39% in June from 9.54% in May.
How does inflation affect
Inflation is directly related to purchasing power. For example, if the inflation rate is 7%, then the value of Rs 100 earned would be just Rs 93. Therefore, one should invest only keeping in view the inflation. Otherwise the value of your money will be reduced.
US interest rates hiked by 0.75%
The US central bank US Federal Reserve recently increased interest rates by 0.75%. The US Fed raised interest rates for the second time in a row, tightening its policy to control inflation. Interest rates in the US have now increased to 2.50%. Earlier, in June 2022 also, the Federal Reserve had increased interest rates by 0.75%.
Inflation highest since 1980
Inflation in the US is the highest since 1980. Here inflation reached 9.1% in June. After this increase, there is a possibility of recession in America. However, Federal Reserve Chairman Jerome Powell has ruled out the possibility of an economic slowdown for the time being. The US Fed has clearly said that interest rates can be increased again if inflation is not controlled. The central bank wants to bring inflation down to 2%.
Also Read: Inflation: Growth rate of service sector lowest in four months due to high inflation
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