The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) raised interest rates by 35 basis points on December 7. This will further force banks to raise interest rates particularly impacting home loan borrowers.
RBI’s monetary policy is aimed at controlling the supply of money in the economy. It does this by changing the interest rate it charges on loans and deposits, as well as by influencing the exchange rate of the Indian Rupee. The RBI has the power to increase or decrease the cash reserve ratio (CRR) and the repo rate. The CRR is the percentage of deposits that banks must keep with the central bank, while the repo rate is the rate at which the RBI lends money to commercial banks.
Effects on Home Loan Owners
The changes in RBI’s monetary policy have a direct impact on home loan owners. A decrease in the CRR or repo rate will lead to a reduction in home loan interest rates, as banks will have access to cheaper funds. This means that home loan owners will be able to pay a lower interest rate on their loans. On the other hand, an increase in the CRR or repo rate will lead to an increase in home loan interest rates, making it more expensive for borrowers to service their debts.
Impact on Loan Repayments
The changes in RBI’s monetary policy will also have an effect on the amount home loan owners have to pay each month. For example, if the RBI reduces the repo rate, banks may reduce the EMI (Equated Monthly Installment) payable by borrowers. This means that home loan owners will have to pay a lower amount each month, which will make it easier for them to manage their debts. On the other hand, if the RBI increases the repo rate, banks may increase the EMI payable by borrowers, making it more difficult for them to service their loans.
How Monetary Policy Affects Prices
Monetary policy impacts prices through its influence on the cost of credit and the money supply. When the RBI increases the money supply, there is an increase in the availability of credit, which leads to an increase in demand for goods and services. This causes prices to rise as businesses need to increase their production to meet the higher demand. On the other hand, when the RBI decreases the money supply, there is a decrease in the availability of credit and demand for goods and services falls, resulting in a decrease in prices.
The RBI's monetary policy also affects prices through its influence on interest rates. When the RBI increases the interest rate, it makes borrowing costlier. This leads to a decrease in investment and consumption, which in turn leads to a decrease in demand for goods and services. This causes prices to fall as businesses reduce their production due to the decrease in demand. On the other hand, when the RBI decreases the interest rate, it makes borrowing cheaper, leading to an increase in investment and consumption. This causes prices to rise as businesses need to increase their production to meet the higher demand.