This action might not be possible to undo. Are you sure you want to continue?
MUMBAI: Auto and home loans are set to get costlier as India‟s central bank Thursday hiked
short term lending rates by 25 basis points in a bid to curb inflation and indicated that more such increases were in the offing. The Reserve Bank of India (RBI) raised the repo rate by 25 basis points from 7.25 per cent to 7.50 per cent with immediate effect. As per the structural changes announced in the monetary policy for 2011-12, the reverse repo rate stands automatically revised to 6.5 per cent. This is the tenth time the RBI has raised interest rates since March 2010. The RBI, in the mid-quarter monetary policy review said, “Domestic inflation remains high and much above the comfort zone of the Reserve Bank. While the Reserve Bank needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory,” the RBI added. Latest data showed that annual inflation rose to 9.06 per cent in May, compared to 8.66 per cent in the previous month. Food inflation too is hovering around a high 8.96 per cent as recorded for the week ending June 4. The central bank said that the current increase in repo rate would help “contain inflation and anchor inflationary expectations by reining in demand side pressures and mitigate the risk to growth from potentially adverse global developments.” Other policy rates such as the statutory liquidity ratio and the cash reserve ratio - the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities - have been left untouched. The bank rate also remains unchanged at 6 per cent. Signalling continuation of its hawkish monetary stance, the RBI said it would persist with more rate hikes to contain inflation. “Based on the current and evolving growth and inflation scenario, the Reserve Bank will need to persist with its anti-inflationary stance of monetary policy,” the central bank said. It also maintained the projection for gross domestic product growth for 2011-12 at around 8 per cent. Meanwhile the Finance Minister, Pranab Mukherjee, speaking in New Delhi on Thursday said the increase of 25 basis points in repo rate by RBI is a move to maintain an interest rate environment that moderates inflation and checks inflationary expectations. The Finance Minister was reacting to Monetary Policy announcement by the central bank in which it has raised the repo rate by 25 basis points to 7.5 per cent. The cash reserve ratio (amount of funds that banks have to keep with RBI), however, has been left unchanged at 6 per cent. Mr Mukherjee said that this was on expected lines, as the core inflation hardened to 8.71 per cent
In this article. Note that this article is limited in its scope of looking at these two changes only from a viewpoint of how a common man is affected directly. there were some changes announced in repo rate and saving bank account interest rates by RBI.in May 2011 in comparison to 7. Note that this article is limited in its scope by looking at the two changes from the point of view of its direct impact on a common man. Let me quickly go through two main changes which RBI recently changed and explain to you how it impacts common man. He said that there was a need to have better price stability for sustaining growth in the medium-term. Do you want to know how you as an investor would get impacted with the recent changes done by RBI? I have seen that a common man always ignores this kind of news because it looks too complicated to him or he can‟t understand how his life will be affected by such fluctuations. .93 per cent in April 2011. I will touch two most important changes that were recently disclosed by RBI and show you in simple manner how it‟s directly related to a common man. How RBI rate hike impacts your financial life ? Few days back.
So if your interest rate for home loan or Auto loan was 10% p. now you understood how change in repo rate directly impacts a common man.0%. 15 yrs tenure. the person has opted for floating interest rate option while taking the loan. This has direct impact on the EMI which you pay for your house.25% right now. which was increased by 0.5% by RBI and is at 7. This means there was a 2. it will now increase to 10. With an increase of 0. Now change in repo rate has a direct impact in the interest rates offered to customers for loans by the same or by more magnitude. If you had bought a house worth 30 lacs @10% interest. then the EMI would be Rs 32. and then RBI increased it up to 7. your EMI can shoot up so much that it would make your cash flow very uncomfortable.25% today.238. So now what are the effects of it on a common man? Let‟s understand this concept.5% in repo rate. That‟s an increase of Rs 924 on every EMI.50% at least. However if the interest rates rise by 1%. because that change in repo rate is passed on to common man and his EMI‟s are affected in the case.a. .5% in interest (10. Increase in Repo Rate by 0.25%): Repo rate is a rate at which Bank borrows money from RBI.25% increase in the last 14 months. your EMI will rise to Rs 33. Banks offer loans like Home loans and Auto loans to someone at an interest rate which is directly proportional to Repo rate (interest rate for common man = repo rate + X %). Chanda Kochar (Managing Director of ICICI Bank) has already said that this repo rate increase can increase the interest rates for end consumers in the range of 0. Now imagine if you took the loan at the time of low-interest rates and over the years the interest rates keep rising every quarter. You can understand the impact of this on EMI rise over the last 1 yr! Hence.5% (6.75% to 7. the repo rate was 5%.5% – 1.162. Now with the increase of 0. For example. Let‟s see the calculations. 1.5%). just last year in Mar 2010.860 (calculate yourself). in that case your EMI will increase by Rs. this increase will directly be passed to a common man (in case of floating interest rates). In fact. In fact some banks like IDBI bank and Yes Bank have already increased their interest rate for loan takers.1.
This is not a good thing for the bank. PNB.5% on that kind of money . That‟s a simple reason why you should have expected a big fall in banking stocks and that‟s exactly what has happened on the day when this news came in that saving account interest has been raised. SBI and Yes Bank tumbled 6. and likely rise in auto loan. it would directly impact Bank‟s profitability. diminishing outlook for automobile space.07 per cent.47 per cent. high fuel prices. Taking a hit of 0. ICICI Bank and HDFC Bank dropped 2.76 per cent and 2.50% which was set long back. Suddenly a bank which was able to add up that 0. RBI increases it to 4%. While the hike in saving rates is expected to hit the net income margins of the banks. in a way it‟s a good thing that a person will get higher interest rate on his cash lying in the saving bank account.50% interest on the money will now have to pay 4% interest.03 per cent and 4. But finally with this year‟s credit policy.5% interest in its profits has to pay it to customers and that would hit their margins. Now you must be thinking how does this impact common man? It‟s a good thing for account holders. Banking and automobile stocks anchored the broad-based selling.40 per cent. 4. (source) Note that around 22% of the money in banking system lies in normal savings bank account and that‟s approximately 10 lakhs crore in all the banks. Bank of India. but let‟s see how it impacts a bank. Bank‟s profits will come down by that much amount. 5.03 per cent. That means now. Well.2. Till now it was 3. respectively. A bank that was paying 3. muted sales numbers in April. Among banking stocks.5% to 4% : The second change which RBI has done is to increase the saving bank interest rate. Increase of saving bank interest from 3. many years ago and was never revised.
While the RBI had deregulated interest rates on fixed deposit schemes in 1997. The interest rate on savings bank deposits has remained unchanged at 3. total money with bank in all forms) is very high. Clearly banks like ICICI bank. 2010. SBI bank. That‟s a direct impact of the bank margin of profits. As indicated in the second quarter review of Monetary Policy 2010-11 on November 2.000 crore. much higher than the average of 20% across all other banks. Punjab National and HDFC banks are the names I can think because their saving bank deposits stand in range of 30-35%. Lending rates can go up by 50-75 basis points. .” – Source Conclusion: Repo rate fluctuations which come from Banks in the form of increased interest rate for loans will directly impact common man. 2003. The biggest benefit a person can from such fluctuations is if he time‟s his decisions based on where the interest rates are inclined towards. saying that deregulation of interest rates on savings bank (SB) accounts would benefit savers. as it would enable lenders to come out with innovative products to attract more funds from low-income households.is Rs 5. Knowing this can help an investor in many ways. which means those who only put money in bank will stand to gain and the people who took loan will be losing out. The worst affected will be those banks where saving account ratio (the amount of money lying in bank accounts vs.5 per cent since March 1. said. Now how does this impact the common man? Again this move of increasing the interest rates for saving bank is going to affect banks profitability and banks are going to pass this burden to those people who take loans from them. chairman and managing director of Canara Bank. it continues to fix the rate on savings bank deposits. RBI moots deregulation of savings bank interest rate: MUMBAI: The Reserve Bank of India (RBI) on Thursday made a pitch for deregulation of savings bank deposit rates. It will lead of cost of funds going up but how much will it affect the margins of banks will depend on the extent of pass through of these hikes to consumers in terms of lending rates. the RBI released on its website a discussion paper on „Deregulation of savings bank deposit interest rate'. S Raman. “There was a need to increase savings bank rate.
Reserve Bank of India. Central Office. Deregulation will have another major advantage in that it will help improve the monetary transmission. imparted greater efficiency in resource allocation and strengthened the transmission mechanism of monetary policy. regulation of interest rate on such deposits has impeded the transmission of monetary policy impulses. International experience suggests that in most countries. “The only interest rate that continues to be regulated now is the savings deposit interest rate.” the RBI noted. Monetary Policy Department. Beneficial to savers The empirical evidence suggests that unlike metropolitan areas. a market-based rate of interest on this product has the potential to attract large savings from low-income households.” The RBI said that deregulation of interest rates in India since the early 1990s has improved the competitive environment in the financial system. Therefore. Since savings deposit is a hybrid product. Mumbai-400001. semiurban and urban areas are responsive to interest rate changes in savings deposits. In the light of pros and cons of deregulation of savings deposit interest rate as set out in the discussion paper. savings deposits in rural. which combines the features of current account and term deposit.” the RBI stated. . Central Office Building.“Savings deposit interest rate can not be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system. the RBI has also sought feedback from the general public by May 20 to the Adviser-in-Charge. interest rates on savings bank accounts are set by commercial banks based on market interest rates. which in turn contributed to an increase in financial savings. “Since savings deposits constitute a significant portion of aggregate deposits. the RBI argues that market-based interest rate may be beneficial to savers.” Savings deposit interest rate has not been deregulated for the reason that a large portion of such deposits are held by low-income households in rural and semi-urban areas. “Deregulation will also allow banks to introduce product innovations which could also benefit the depositors. Deregulation of savings bank deposit interest rate also led to product innovations. “These resulted in positive real interest rates. 24th floor. Most countries in Asia experimented with interest rate deregulation to support overall development and growth policies.
" the RBI added. Other policy rates such as the statutory liquidity ratio and the cash reserve ratio -.No change in other statutory rates -. compared to 8.5 percent with immediate effect.Reverse repo automatically revised upwards to 6.Repo rate hiked by 50 basis points to 7.Non-food manufactured products inflation is a matter of particular concern.RBI ups key interest rates by 25 bps to tame inflation: Continuing its hawkish monetary stance to curb high inflation. "The challenge of containing inflation and anchoring inflation expectations persists. Latest data showed that annual inflation rose to 9. the reverse repo rate stands automatically revised to 6. The repo rate was raised by 25 basis points from 7. The bank rate also remains unchanged at 6 percent.25 percent to 7.5 percent -." said the RBI in the mid-quarter monetary policy review.Domestic inflation remains high and much above the comfort zone of the Reserve Bank -.the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities -.Marginal standing facility rate increased to 8. the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory.5 percent -.Baseline projection for GDP growth for 2011-12 maintained at around 8 percent -. Highlights of mid-quarter review of RBI monetary policy: -. suggests more generalised inflationary pressures .5 percent -. "While the Reserve Bank needs to continue with its anti-inflationary stance.5 percent.Deceleration in some interest-sensitive sectors such as automobiles. As per the structural changes announced in the monetary policy for 2011-12.66 percent in the previous month. the tenth time it has raised interest rates since March 2010.have been left untouched. no evidence of any sharp or broad-based slowdown -. the Reserve Bank of India (RBI) Thursday hiked short-term lending rates by 25 basis points.06 percent in May.
The International Monetary Fund has already revised the growth projection of Asian countries. textiles. as per the government data.RBI will persist with its anti-inflationary stance of monetary policy -. The RBI has in fact raised key policy rates nine times since March 2010. 2011 | Place– New Delhi Mocking the repeated assurances of the Finance Minister of the country to control inflation. . RBI mid quarterly review needs to change policy to control inflation: By-Correspondent | Date– June 15. paper products. forecasting a downward trend of Indian‟s growth. The rise has made it evident that the Reserve Bank would once again go for another round of raising interest rates at its mid-quarterly review slated for June 16. This high rise is driven by an increase in prices of manufactured goods such as edible oil. etc. the IMF has projected India‟s growth to dip down to around 8% owing to high inflation and overall global economic turmoil created due to rising prices of commodity goods and oil.66 per cent during the last month. India has seen its headline inflation in May rise to 9.-.Impact of the recent monetary policy actions is still unfolding -.RBI says actions expected to mitigate the risk to growth from potentially adverse global developments -. sugar.48 per cent during the same period a year ago while it was 8.Although global commodity prices have moderate they still pose a risk to both domestic growth and inflation.However it is mentionable that the wholesale price index (WPI) stood at 10. For 2011.RBI says rate hike will contain inflation by reining in demand side pressures and anchor inflation expectations -.06 per cent.
As understood. . All eyes are now on the mid-quarterly review of the RBI scheduled on June 16.Though Finance Minister Pranab Mukherjee has repeatedly stated that the government is keeping a close watch on developments. that too repeatedly in the last fiscal. It is an absolute necessity for the Reserve Bank of India to undertake additional policy changes to tighten its grip on the economy. both domestic as well as international and that they are keen in taming down inflation. the lower growth projection of the country is due to RBI‟s step of excessive increase in interest rates. the actual scenario shows the Reserve Bank and the Indian Finance Ministry has failed so far in controlling inflation.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.