If you have a home loan, your monthly EMI could rise in December.
But the increase may be smaller than people expected earlier.
SBI Research, the research wing of State Bank of India, says the Reserve Bank of India (RBI) may raise its repo rate by 25 basis points.
Earlier, it had expected a 50 basis point rise.
Graphic: News Anek, from the facts in this report
The repo rate is the rate at which the RBI lends money to banks. When it goes up, banks may raise their own loan rates too.
One basis point is one-hundredth of a percentage point. So 25 basis points is a quarter of one percentage point.
The change in view comes as some pressures on the economy have started to ease.
Key points
- The RBI may raise the repo rate by 25 basis points in December, not 50.
- Retail inflation was 6.09 per cent in October, above the RBI's 6 per cent upper limit.
- The rupee has moved back below Rs 94 per US dollar.
- SBI Research sees an equal chance of the rate settling at 6 or 5.75 per cent.
So what does this mean for your EMI?
Banks may pass a rate hike on to borrowers. How much depends on the type of loan and its interest structure.
If you repay a floating-rate loan, the December decision is worth watching closely.
Why is the RBI expected to move less sharply?
Retail inflation rose to 6.09 per cent in October.
That crossed the RBI's upper tolerance limit of 6 per cent, for the first time under the new series.
SBI Research expects inflation to stay above 6 per cent in November.
It then expects inflation to ease in the following months.
Foreign investment of about 7.65 billion US dollars has come in since November 6.
Crude oil prices have also fallen by about 11 per cent since the US elections.
What happens next for interest rates?
SBI Research expects the final rate to settle at 6 per cent.
It sees an equal 50 per cent chance of the rate stopping at 5.75 per cent.
The report does not expect another hike in February.
The RBI is likely to check inflation and other data before its next move.
Exam Corner
UPSC GS Paper 3 · Economy: RBI and repo rate
What's the news
SBI Research says the RBI may raise the repo rate by 25 basis points in December, instead of the 50 basis points it expected earlier.
Background
- The repo rate is the rate at which the RBI lends money to banks. A rise can make bank loans costlier.
- Retail inflation above the RBI's upper tolerance limit of 6 per cent is a key reason for the rate hike view.
- Floating-rate loans are more likely to see EMI changes after a rate hike, depending on their interest structure.
Facts for Prelims
- Retail inflation was 6.09 per cent in October, the first time it crossed the RBI's 6 per cent upper tolerance limit under the new series.
- India received about 7.65 billion US dollars in foreign investment since November 6.
- The terminal repo rate is expected to settle at 6 per cent, with a 5.75 per cent downside possibility.
Content for Mains
- Significance: Repo rate changes affect borrowing costs, savings and inflation across the economy.
- Main issue: Balancing inflation control with support for growth and for borrowers.
- Challenges: Rupee volatility, global uncertainty and crude oil prices can change the RBI's path.
- Way forward: Data-based decisions, currency stability and clear communication can help policy work.
Practice question: Examine how the RBI uses the repo rate to manage inflation, and why its decisions matter for ordinary borrowers.
Prelims practice questions
Q1. What did SBI Research expect the RBI to do in December?
- Cut the repo rate by 25 bps
- Hike the repo rate by 50 bps
- Hike the repo rate by 25 bps
- Keep the rate unchanged
Show answer
Answer: C. The report says a 25 bps hike is now more likely than the earlier expected 50 bps.
Q2. What was retail inflation in October, as per the report?
- 5.75 per cent
- 6 per cent
- 6.09 per cent
- 7.65 per cent
Show answer
Answer: C. Retail inflation rose to 6.09 per cent in October, above the RBI's 6 per cent upper tolerance limit.
Key terms
- Repo rate: The rate at which the RBI lends money to commercial banks.
- Basis point: One-hundredth of a percentage point, used to show small changes in interest rates.
- Terminal repo rate: The level at which the repo rate is expected to finally settle after a series of changes.
More stories for exam preparation: UPSC Today
These points come from this news report. Check them with standard sources such as NCERT books and PIB before your exam.
