A logo of Reserve Bank of India (File Photo | Reuters)

Reserve Bank of India’s repo rate hike may dampen consumer spending

Repo rate is the rate at which banks borrow funds from the central bank, and hence, any increase in the policy rate invariably results in an increase in interest rates.

MUMBAI: Banks are expected to pass on the Reserve Bank of India’s (RBI) 25 bps repo rate hike and interest rates on all retail loans will likely increase in the coming months. However, the proposed rate hike, just ahead of the festive season, may dampen consumer spending.

Repo rate is the rate at which banks borrow funds from the central bank, and hence, any increase in the policy rate invariably results in an increase in interest rates. Currently, repo rate is set at 6.5 per cent, while interest rates on home and auto loans are in excess of 8 per cent.

A 25 bps rates revision will increase EMIs by about Rs 350-400 depending on the tenure of the loan — be it home, auto or education.

“This is the second consecutive repo hike and will push overall interest rates in the economy, which may impact the real estate and consumer goods sector that has just started seeing green shoots. The hike may act as a temporary dampener, especially in the affordability housing sector, as the borrowing cost for the sector will go up as banks may increase interest rates on loans in the immediate future,” said Rajeev Talwar, CEO, DLF Ltd.

Talwar said that while higher borrowing costs will be temporary, the housing sector outlook remains positive on renewed interest for completed and ready-to-move in properties by end users.

The good news though is for savers, as deposit rates too will likely shoot up. Currently, deposit rates at Public Sector Banks are one of the lowest in the industry at below 7 per cent. While some private and new age banks, to attract customers, are offering higher rates of up to 8 per cent, small savings schemes like post office deposits bear an interest rate spread of above 7 per cent.

Wednesday’s policy rate hike, thus, is expected to bring rate parity among banks and other financial institutions with regards to deposits. An increase in deposit rates is also deemed essential for nationalised banks, if they were to retain their market share in the total household savings pie.

What is implied
■ Repo rate is the rate at which banks borrow funds from the central bank
■ Any increase in the policy rate invariably results in an increase in interest rates
■ Currently, repo rate is set at 6.5%. Interest on home and auto loans are in excess of 8%
■ A 25 bps rates revision will increase EMIs by about J350-400 depending on loan tenure