RBI likely to go for 25 bps interest rate hike

Inflation Still A Concern

- 1st MPC meeting this fiscal in progress

- Inflation continues to be a lingering problem

- Opec lowered oil production

- Russia consumer inflation also impacting

Mumbai: In spite of the demand being raised from various sectors against further interest rate increase, the Reserve Bank of India (RBI) is likely to go for yet another rate hike when it unveils decisions taken by the ongoing MPC meeting today (April 6). The reason is the 25-basis-point rate hike by the US Federal Reserve in the recent past. The RBI is expected to go in for a 25-bps rate hike in this monetary policy. With the continuous rise in interest rates, EMIs for home loan buyers are going up, impacting affordable housing segment.

Shishir Baijal, Chairman & Managing Director, Knight Frank India, said: “In its first MPC meeting for the financial year 2023-24, the RBI is expected to hike the repo rate by 25 bps as inflation continues to be a lingering problem. The course of rate hike is more likely to be aligned with the stance taken by key central banks such as the US Fed.”

With the recent crude oil production cut by the OPEC and Russia, consumer inflation is unlikely to ebb anytime soon. Consumer inflation in the core categories (ex-food and fuel) as well has stayed persistently high above 6 per cent for the last 22 months.

In FY23, RBI cumulatively hiked the repo rate by 250 bps from 4 per cent to 6.5 per cent, levels witnessed in Jan 2019. According to Baijal, “From a housing market perspective, despite a sharp rise in repo rate which has immediately transmitted into lending rates, the housing demand has continued to sustain thus far. The outstanding home loans grew by 15 per cent in FY23 (Until Feb 2023).”

However, any further rate hikes coupled with elevated prices could potentially dampen the purchasing capacity of the consumers, which in turn can curtail demand. Therefore, we remain cautious of the impact of prolonged rate hikes on the housing sector as well as overall consumer demand in the economy, he said.

Talking to Bizz Buzz, Atul Monga, Founder and CEO, BASIC Home Loan, says: “In the rising interest rate scenario, it's important for consumers to structure their home loan in a way that allows them to manage their monthly payments and overall debt”. He has suggested some steps one can take to structure one’s home loan in the face of rising interest rate.

First, choose a fixed-rate loan: When interest rates are rising, it's often a good idea to choose a fixed-rate home loan over an adjustable-rate home loan. With a fixed-rate mortgage, your interest rate will remain the same throughout the life of the loan, so you won't have to worry about your monthly payments increasing with rising interest rates.

Secondly, consider a shorter loan term: Another way to structure your home loan is to consider a shorter loan term. While a 30-year home loan may have a lower monthly payment, a shorter loan term, such as 15 or 20 years, will allow you to pay off your mortgage faster and reduce the overall amount of interest you'll pay over the life of the loan.

Thirdly, increase your down payment: If you have the ability to do so, increasing your down payment can also help you structure your home loan in the face of rising interest rates. By putting more money down upfront, you'll reduce the amount of principal you have to borrow and lower your monthly payments.

Fourthly, refinance your existing home loan: If you already have a mortgage and interest rates have risen since you took out the loan, refinancing may be a good option. Refinancing to a lower interest rate can help you reduce your monthly payments and the overall amount of interest you'll pay over the life of the loan.

Finally, it's important to keep an eye on interest rates and be prepared to take action if they start to rise. This may include refinancing your loan, adjusting your monthly budget to accommodate higher payments.

Deepak Agrawal, CIO-Debt, Kotak Mahindra AMC, Kotak Mahindra AMC, said, “Given Real policy rates upward of 100 bps rate basis, significant monetary tightening over last one year and the lag with which monetary policy operates, he expected RBI to change stance to ‘neutral’ and stay on hold for rest of CY23.”

Given that Federal Reserve & European Central Bank have gone ahead with rate hike in spite of recent global developments and Q4FY23 inflation numbers are higher than RBI projections, RBI to hike repo rate by 25 bps to 6.75 per cent, he added.