Repo rate hike by RBI isn’t good news for small businesses and nation at large, feel experts

In trying to manage a tightrope walk between growth, inflation, and capital outflow, the decision of the Monetary Policy Committee (MPC) to increase the policy rate by 50 bps to 5.40% with immediate effect will not spell good for small businesses and the nation at large, experts feel.

The rate hike is the highest since August 2019 and will hit new borrowings and turn long-term retail loans costlier.

Reserve Bank of India (RBI) Governor Shaktikanta Das announced that the MPC had unanimously decided to increase the policy repo rate by 50 basis points to 5.4% with immediate effect. Standing Deposit Facility Rate stands adjusted to 5.1%, and the Marginal Standing Facility Rate and bank rate stand revised to 5.65%.

Traditionally, the RBI raised the benchmark repo rate or the interest rate at which banks borrow money from the central bank to curtail the supply of money in the economy. Experts pointed out that therefore, lower interest rates allow easy borrowing, and businesses typically borrow to invest in new economic activities. Hence, the larger the cash supply, the more inflation.

With interest rates at which banks borrow set to go up, personal loans, auto loans, and home loans will get expensive and new borrowers can expect EMIs to shoot up. Bank depositors, however, will now benefit from higher returns on their deposits subject to the banks passing on the new interest rate hike.

Reacting to the MPC decision at the culmination of a three-day consultation process, Kaushik Basu, professor of economics, at Cornell University and former chief economist at the World Bank said, “The RBI raising the repo rate by 50 bps is a good move. But with the wholesale price inflation of 15.18% and consumer inflation of 7.01%, small businesses in India are making losses and closing. While this may be good for big businesses, it is not good for the nation. We need a fiscal policy to correct this.”

Experts also questioned the ‘not dovish’ stand adopted by the MPC in the rate hike taking it to pre-pandemic levels. “The withdrawal of an accommodative stance being maintained is contrary to market expectations of a dovish approach,” a banker observed.

Most felt that though the RBI MPC was in line with expectations, the hike was much over the 25-30 bps points expected.

“Inflation seems to be at the forefront of the move as they maintained CPI forecasts intact at 6.7% for FY 2022-23. To us, this means we are not done with the rate hiking cycle yet and we could brace for a continued northward journey in rates,” Lakshmi Iyer, Chief Investment Officer for Debt at Kotak Mahindra Asset Management said.

Ramesh Nair, CEO of Colliers India, a diversified real estate professional services and investment management firm noted that with the hike in the repo rate, several banks had begun rising home loan rates. “This is a trend that is expected to continue. While the housing sector has witnessed a recovery in demand across segments over the last year, the higher home loan rates could dent homebuyer sentiments,” he observed.

According to Vipul Patel, Founder of loan consultancy firm MortgageWorld, those with larger loans will have to make higher interest payouts. “To cite an example, the revised repayment period for a Rs. 1 crore home loan with an interest rate of 7.5% and original tenure of 20 years (240 months) will be over 22 years (265 months). This means that the interest payout over this period will rise by close to Rs. 20 lakh. So, with the EMIs increasing, the borrower will have to shell Rs. 3,085 more every month, and the overall increase in interest burden will be Rs 7.4 lakh,” he explained.