Customers with repo rate-linked home loans are likely to reach an EMI level where their lender will not be in position to increase the tenure, meaning monthly payments would rise.
The repo rate hike of 35 basis points (bps) was in line with market expectations, but the finer points in Reserve Bank of India (RBI) Governor Shaktikanta Das’s speech were more hawkish.
Controlling inflation within the RBI’s defined comfort level of 4%-6% continues to be the prime driver of decision making by the Monetary Policy Committee (MPC).
With the December 7 move, the total increase in the repo rate has reached a level of 225 basis points in this financial year. One basis point is one-hundredth of a percentage point.
RBI’s decision was guided by retail inflation that is above the upper bound of 6% although the Consumer Price Index-based inflation moderated to 6.8 percent (Y-o-Y) in October 2022 from 7.4 percent in September 2022. The MPC said that it is banking on further calibrated monetary policy action to keep inflation anchored within its comfort zone.
While India’s Gross Domestic Product (GDP) is growing at a rate that is among the highest in the world, it will be a big mistake to assume that India is isolated from global factors.
A looming economic recession in many parts of the world, geopolitical tensions, policy rate hikes across world to control unprecedented inflation, and commodity price fluctuations are bound to catch up at some stage and impact India. So far, we have navigated the external threats through smart fiscal and monetary policy moves. The price of crude oil and currency depreciation are two added variables that India has to navigate.
So far, credit demand has continued its upward trajectory. The small and medium enterprise (SME) sector has bounced back and has been willing to add capacity. The festive season facilitated the growth of consumption demand for retail goods and services. The consumption demand in the urban market has mostly peaked out and rural demand is still recovering post- monsoon.
Rising interest rates are bound to have some ramifications for both business and salaried classes. Customers with repo-linked home loans are likely to reach an Equated Monthly Instalment (EMI) level where their lenders will not be in a position to increase the loan tenure, meaning their EMIs would go up. Rising EMIs will impact both existing homebuyers and potential loan customers.
Likewise, with salary levels rising, small-ticket unsecured lending has flourished, but will feel the impact as interest rates go further up. It needs to be closely watched as to what will happen to demand for small-ticket personal loans and the performance of existing loan portfolios.
While the World Bank has revised India’s GDP growth projection upward for FY23 to 6.9% from 6.5%, citing the country’s higher resilience to geopolitical events and better-than-expected second-quarter corporate results, the RBI expects the economy to grow a tad lower at 6.8% in FY23.
That the terminal repo rate is likely to reach 6.50 percent is more or less a given, considering the likely inflation numbers for Q1 and Q2 of FY24. The new conundrum that needs to be resolved is whether the interest rate cycle has peaked (how high) and if it has peaked, then how long it will stay at this elevated level before seeing any downward revision.
FY24 appears to be a year of stable interest rates with GDP growth rate slightly tapering off compared to the FY23 estimate of 6.8%.