EMIs to rise as RBI hikes key lending rate

The central bank's move was in line with what most economists expected and came after three consecutive 50-basis-point hikes

The Reserve Bank of India raised its key lending rate by a more modest 35 basis points to 6.25 per cent on Wednesday, citing slowing inflation in Asia’s third-largest economy.

The central bank's move was in line with what most economists expected and came after it implemented three consecutive 50-basis-point hikes to fight persistent pricing pressures.

The RBI has raised interest rates by 2.25 percentage points since May and the latest repo rate of 6.25 per cent is at the highest level it has been in four years, pushing up the EMIs of existing loan holders and dimming the prospects of seekers of floating-interest loans as they are bound to pay a higher rate of interest on the same amount of principal with each rate-hike.

Read | RBI cuts FY23 GDP growth projection to 6.8%

"From the consumers’ perspective, the rate hike will see an increase in EMIs, but is likely to be absorbed by some segments like home and car buyers, where the demand is quite robust. However, there is likely to be an impact on small loans (tied to) two-wheeler and consumer durable loans and microfinance sector," said Dr Sugant R, Dean, School of Economics and Commerce, CMR University.

Real estate industry experts played down the concerns.

“This hike will undoubtedly push up home loan interest rates, which had already crept up after four consecutive rate hikes this year. However, as long as interest rates remain in single digits (mainly within 9.5 per cent), the impact on housing will at best be moderate,” said Anuj Puri, the chairman of Anarock group.

Inflation fight

The RBI, which maintained its inflation forecast for FY23 at 6.7 per cent, made it clear it was not done with its fight against pricing pressures.

Read | 'RBI ready to inject more cash, if needed,' says Governor Shaktikanta Das

“Growth in India remains resilient and inflation is expected to moderate,” RBI Governor Shaktikanta Das said in a webcast on Wednesday. “But the battle against inflation is not over. Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain.”

Economists see more moderate rate increases ahead.

"This (rate hike) suggests that there may be more room for another shallow increase of up to 25 basis points to reach a neutral rate, though this does not necessarily imply the end of the cycle," said Madhavi Arora, Lead Economist, Emkay Global Financial Services.

The RBI also cut its real GDP forecast to 6.8 per cent from 7 per cent for FY23.

"Even after this revision in our growth projection for 2022-23, India will still be among the fastest-growing major economies in the world," Das said.