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RBI hikes lending rates to 5.9%, here is what it means for J&K’s businesses and households


Srinagar, Sept 30: The Reserve Bank of India (RBI) today raised the repo rate (repurchase rate) for the fourth time in a row.

What does it mean for J&K’s businesses and households? Will the current high cost of living subside? Will existing and newly got bank loans attract more interest? Will the interest rates bank depositors get on their deposits in J&K get a hike?

Ziraat Times here produces a brief summary of the implications of this move for J&K’s households and businesses:

What the repo rate actually mean?

Repo rate refers to the interest rate at which commercial banks like J&K Bank, HDFC Bank, SBI etc  borrow short-term funds from the RBI by selling their securities to the Reserve Bank. After Friday’s announcement, the new repo rate stands at 5.9 per cent, while the reverse repo rate continues to stand at 3.35 per cent.

How is this rate hike expected to curtail inflation?

A higher interest rate is normally expected to enable the central bank to slow down the money supply and investment activities in the economy, which is instrumental in controlling inflation. Inflation refers to the rate of increase in the prices of goods and services consumed and bought. Lower interest rate, on the other hand, makes borrowing easier, and businesses frequently borrow to invest in new economic ventures, increasing the money inflow in the economy. With more money, an increase in demand for goods and services affects supply and results in a price rise of retail commodities.

To what extent it would bring down retail in J&K, there is little statistical data available as of now.

While drafting its bi-monthly monetary policy, the country’s apex bank considers the current economic condition because its target is to keep inflation under control.

Why food prices are a target?

The food index’s rise is the major cause behind the overall increase in retail inflation, country’s top economists maintain. Significantly, in March 2021, the government directed the RBI to maintain retail inflation in the range of 2-6 per cent for a five-year period ending March 2026.

This is the reason why rates of apples is not allowed to increase and kept in a horizontal bar so as not to affect overall inflation rate.

Bank loans to become costlier,  EMIs for existing loans to go up

All banks in J&K will hike the rates at which customers borrow money from them to compensate for the hike in the repo rate. This happens because Banks offer loans to retail consumers at an interest rate which is directly proportional to the repo rate charged by RBI.

Now, the increase of 0.50 per cent in repo rate will lead to higher interest rates on loans for borrowers.

This also implies that the EMIs (equated monthly instalments) for repaying the existing loans will increase going forward.

For instance, if you have bought a house worth Rs 50 lakh at the rate of 10 per cent interest for 15 years of the tenure, then the EMI would be Rs 53,730. With an increase of 0.50 per cent in interest, your EMI will rise to Rs. 55,270.

Buying a house or vehicle will be harder 

All Commercial banks link their retail loans, such as home, vehicle, personal, and business loans, to the repo rate, so they will restructure home and auto loans as the RBI hikes the rates. The interest rates will also increase with an increase in the repo rate. Therefore, buying houses and vehicles will become costlier with the rate hike.

Deposit rates likely to rise

A positive thing that usually happens when the repo rate rises is an increase in interest rates offered in bank deposits. According to experts, consumers with short and medium-term deposit rises, such as savings and fixed deposits (FDs), would marginally benefit from higher rates as they will get higher returns on their deposits depending on how banks pass on the new interest rate hike.

Will shopping sentiment take a hit?

An increase in borrowing costs deters people from making excessive purchases, which lowers the demand for products and services. According to experts, this disrupts the demand and supply chain. Fewer goods and services will be purchased with higher borrowing costs and tightened liquidity, adversely affecting demand. As a result, prices of many goods and services would elevate and become unaffordable for the economically poor segments of society in the short term.

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