Yet another interest rate hike! Shell out more for your loan repayment

Indian rupee
Representational image. Photo: Reuters/Rupak De Chowdhuri

Kochi: The three rounds of continuous hike in interest rates by the Reserve Bank of India (RBI) recently have come as a severe setback to the public and the businesses in Kerala.

The interest rate hike has apparently benefitted only banks and other money lending agencies. The higher interest rate invariably pushes up price for all products. Those who took car and housing loans will now have to shoulder additional interest burden.

Now, the public will be flooded with messages, informing them about the corresponding hike in the interest rate of bank loans.

For depositors, it will take another two or three tri-months to get the benefit of the increased interest rates. But even then, they don't have to expect benefits, commensurate with the increase in the interest rates.

Three in a row

In a short span of 94 days, there has been an increase of 1.4 percent in interest rates. On May 4, there was a hike of 0.4 percent, while in June, the hike was for 0.5%. The latest hike announced on Friday was for another 0.5 percent.

Further increase in interest rates has to be expected. The next round of hike in interest rate is likely to fall on September 30.

According to some observers, another one percent increase in interest rates is likely in the next nine months.

Why the rates go up
The main reason behind the hike in interest rates is to bring more revenue to the banks from the interest component.

There is an increase of 14-16 percent in the demand for loans and it is sure that the hike in interest rates for loans will soon set the cash counters of the banks ringing.

Meanwhile, the banks are not so keen on increasing their deposit base since they have abundant money in their hands right now.

The inflationary tendencies are cited to be the main reason for hiking interest rates. But the irony is that inflation has not come down even after hiking interest rates thrice. On the other hand, inflation has actually gone up.

The latest inflation rate is 7.1%. The price rise in India alone is not causing inflation. Factors such as high prices for imported oil are also contributing in a big way to inflationary pressures.

According to studies, it is estimated that the purchasing capacity of the general public has shrunk by 11% after the central bank increased interest rates thrice in the recent past.

A person who had the capacity to buy a house worth Rs 50 lakh earlier now has the purchasing capacity of only Rs 44,50,000! 

Interest rate returns to pre-COVID-19 levels  

It's recently that RBI raised the Repo rates by 50 basis points to 5.4 percent. It was in August 2019 that the Repo rates had touched the 5.4% mark last time. 

During the beginning stage of the spread of COVID-19 pandemic, the Repo rate was at 5.15%. 

After August, 2018, it was in May this year that the interest rate was hiked for the first time.     

RBI Governor Shaktikanta Das, while announcing the hike in interest rates, gave a hint that the Monetary Policy Committee (MPC) meeting to be held on September 28 to 30 would take up further hike in interest rates. 

According to experts, there might be a chance for another hike of 0.5% in Repo rates.

India's inflation rate has been going on at a level of above six percent, which is above the RBI's tolerance level, for the last six months. 

The inflation rate calculated on the basis of June's Consumer Price Index (CPI) stands at 7.01 percent. This has led to an assumption that the inflation rate in this fiscal year is expected to be 6.7%. 

The country's GDP growth is estimated to be 7.2 percent.   (With inputs from Jikku Varghese Jacob)

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