Inflation hits more, RBI helpless: Your loan to become expensive,

Winning Bizness Desk

Mumbai. Concerned about rising inflation, the Reserve Bank of India (RBI) increased the repo rate from 4% to 4.40% resulting your loan more expensive and making you pay more EMI. An emergency meeting of the Monetary Policy Committee was held on May 2 and 3, in which this decision was taken. The monetary policy meeting is held every two months. The last meeting was held on 6-8 April. The last time the repo rate changed was on 22 May 2020. Since then it has remained at a historic low of 4%. Repo rate is the rate at which banks get loans from RBI, whereas reverse repo rate is the rate at which banks get interest on keeping their money with RBI.

Repo rate and EMI connection

When RBI reduces the repo rate, banks also reduce the interest rates most of the time. This means that the interest rates of the loans given to the customers are lower, as well as the EMI is also reduced. Similarly, when there is an increase in the repo rate, the loan becomes costlier for the customer due to the increase in interest rates. This is because commercial banks get money from the central bank at higher prices, which forces them to raise rates.

How much difference will a 0.40% interest increase make?

Suppose Anand has taken a house loan of Rs 10 lakh for 20 years at 6% rate of interest. The EMI of his loan is Rs 7164. In 20 years, he will have to pay an interest of Rs 7,19,435 at this rate. That is, he will have to pay a total of Rs 17,19,435 instead of 10 lakhs. One month after he took the loan, RBI increased the repo rate by 0.40%. Now when a friend reaches the bank to take a loan, the bank offers him a 6.40% rate of interest due to the increase in the repo rate.

Anand's friend also takes a loan of Rs 10 lakh only for 20 years, but his EMI comes to Rs 7,397. That is, Rs 233 more than Anand's EMI. Because of this, Anand's friend will have to pay a total of Rs 17,75,274 in 20 years. This is 55 thousand more than Anand's amount.

CRR also increased by 0.50%

RBI has also decided to increase the Cash Reserve Ratio (CRR) by 0.50%. It has been increased to 4.5%. CRR is the amount that banks have to keep with the Reserve Bank of India (RBI) at all times. If the central bank decides to increase the CRR, the amount available with the banks for disbursal gets reduced. Uses CRR to reduce liquidity from the system.

RBI's decision surprising for the market

RBI's sudden increase in interest rates in this way was quite surprising for the market. After this decision, the Sensex fell by about 1300 points to reach near 55,700. Market expert Ajay Bagga said that this is very bad for the market. RBI should not have taken such a sudden decision. Senior Economist Brinda Jagirdar said that the RBI had to take this decision due to the rise in inflation.

RBI worried about rising inflation

The emergency meeting of RBI's Monetary Policy Committee (MPC) has been held at a time when there is a huge volatility in crude oil to metal prices due to the Russia-Ukraine war. In such a situation, inflation has become a big problem all over the world. In the last meeting, RBI had projected inflation to be 6.3% in the first quarter, 5% in the second quarter, 5.4% in the third quarter and 5.1% in the fourth quarter.