RBI hikes repo rate to 6.5%, projects GDP growth at 6.4% for 2023-24

The interest rate that the RBI charges when commercial banks borrow money from it is called the repo rate.

The RBI governor noted that the world economy is not looking so grim anymore and that inflation also appears to be coming down. “RBI’s MPC decided 4:2 vote to remain focused on withdrawal of accommodative policy,” he said. The RBI also projected India’s GDP growth at 6.4 per cent for 2023-24.

The Central bank has projected retail inflation at 6.5 per cent for 2022-23 and 5.3 per cent for the next fiscal.

In December 2022, the MPC hiked the Repo rate — the key policy rate — by 35 basis points to 6.25 per cent in a bid to rein in retail inflation.

“The global economic outlook doesn’t look as grim now as it did a few months ago, growth prospects in major economies have improved while inflation is on a descent though inflation still remains well-above the target in major economies,” RBI Governor Shaktikanta Das said on Wednesday.

Flagging the unprecedented contractions facing monetary policy, he said: “Unprecedented events of the last three years have put to test monetary policy across the world. Emerging market economies are facing sharp tradeoffs between supporting economic activity and controlling inflation while preserving policy credibility.”

Adil Shetty, CEO bankbazaar.com reacts:

Floating rate home loan pre-payments may be required, especially for anyone who borrowed at under 7% in the last 2 years. Some tips:

1. Increase EMI once a year by 5%. This will pull your tenor back by a few months. Next year, take stock and repeat the dose if required. Make this an annual exercise.
2. A 20-year loan can be repaid in 12 years if you pre-pay 5% of the loan balance once a year. You could go faster or slower depending on your situation. A home loan is a low-cost loan so for most, it makes sense to repay it slowly while balancing it with investing needs. The markets have returned 12% over the long-term and the cost of a home loan with tax deductions may be 5-7% a year.
3. Above all, what matters is the timeframe in which you intend to repay the loan. For example, your intention was to repay a 20-year loan in 10 years but the rate hikes have taken your tenor to 25 years. In this case, ensure that for the next 10 years, you pay back at least 10% of the loan through a combination of EMIs and pre-payments. This will keep you on track for your goal.

Fixed deposits:
Most banks are now offering rates of 7% or higher. For senior citizens, most banks offer a 50 BPS benefit. These rates are on tenors of around 2 years. This is a good time to lock in to these high rates.

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