Rates are rising, so make cuts: EMI pressure will increase, impacting consumption and loan demand

According to bankers and analysts, the Reserve Bank of India’s fourth interest rate increase in five months will increase equated monthly instalments (EMIs) for individual borrowers and may have an impact on consumption and loan demand. This is particularly true given that there is no end in sight to the current cycle of rate increases.

The RBI announced a further 50 basis point hike in its benchmark repo rate on Friday. As in the previous five months, banks are likely to pass this increase on to individual borrowers. Home, automobile, and personal consumption loans are therefore expected to increase in price. 0.01 percent is equal to one basis point.

Home loans, which often make up the largest portion of EMIs in a person’s loan portfolio, have increased by as much as 140 basis points this fiscal year and are anticipated to climb another 50 basis points as a result of the most recent RBI rate hike.

For instance, a borrower who took out a loan for one crore rupees in April and paid an EMI of 75,739 rupees at 6.70% annual interest is now paying 84,267 rupees at 8.10% annual interest, and it is likely that the EMI will rise to 87,416 rupees after the most recent rate increase, which is likely to be at 8.60%.

“This is the fastest rate increase in recent memory. Indian rates are now closely aligned to global rates and with central banks like the US Federal Reserve expected to hike rates further, it is likely that the RBI will also follow suit. Added to all this is the higher oil prices and a rising dollar, and there is now a real threat of stagflation which we once saw in the 1970s,” said Raj Khosla, managing director of financial marketplace MyMoneyMantra.

In this year, the RBI increased its benchmark interest rate in May, June, August, and September. Bankers claimed that the increasing trajectory of rates is now firmer. “We will convene and make a decision now that the regulator has made its conclusion. However, interest rates do currently have a strong upward bias “said Sumit Bali, director of payments and retail loans at Axis Bank.

Bankers point out that the extremely easy liquidity conditions that kept rates artificially low during the epidemic are what led to the present rate rises. A senior public sector banker official said that “we are coming off a two-year period of record low interest rates at 4% and even with these hikes (it is still) below the most recent peak of 6.5% observed in 2019.”

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