Narendra Modi and Indian economy: What do the hard facts on repo rate, credit policy, inflation, EMIs say

The Repo rate, the rate at which RBI lends money to commercial banks, was hiked by 0.5 per cent or 50 basis points to 5.4 per cent on 5 August 2022. The Monetary Policy Committee (MPC) of the RBI came to this judgment since it felt the need to keep inflation and inflationary expectations under check, without compromising on India’s domestic economy which is in the midst of a full-blown V-shaped recovery.

Before getting into the Repo rate in detail, it is worth noting that the Bharat Bill Payment System (BBPS), an interoperable platform for standardised bill payments, will now be able to accept cross-border inward bill payments. This will thereby enable NRIs too, to use BBPS to pay their bills for utility, education and other such services, on behalf of their families in India.

Again, to make the RB-IOS more broad-based, credit information companies (CICs) are being brought under the RB-IOS framework. With this, we get a cost-free alternative mechanism for redressal of grievances against CICs. Also, CICs will now need to have their own internal Ombudsman (IO) framework. The RBI has decided to set up a committee to explore the need for transitioning to an alternative benchmark for Mumbai Interbank Outright Rate (MIBOR) and suggest the way forward.

The RBI has retained the GDP growth forecast for FY23 at 7.2 per cent and inflation forecast at 6.7 per cent for the current financial year, assuming the average crude oil price at $105 per barrel. Since India imports over 83 per cent of its crude requirements, a fall in global oil prices will mean India’s GDP growth will further accelerate going forward while Inflation will come down faster.

For instance, retail inflation (CPI) is already down from 7.01 per cent in June 2022, to 6.71 per cent in July 2022. In that period, food inflation too has fallen from 7.75 per cent to 6.75 per cent, which bodes well. While the RBI expects the CPI to fall to 5 per cent only by the June 2023 quarter, there is good reason to believe India could see inflation tapering off to 5 per cent much earlier, if the monetary transmission of the Repo rate hikes becomes quicker.

On inflation, the RBI is looking to persevere with its stance of withdrawal of accommodation, to ensure that inflation moves close to the target of 4 per cent over the medium term. Those criticising the Modi government for a rise in the Repo rate need to understand that an economy like India that grew at 8.7 per cent last year and is slated to grow in excess of 7 per cent in the ongoing fiscal year, cannot continue to have a Repo rate of 4 per cent or thereabouts.

RBI, till date has raised Repo rate by 140bps in 2022, with the first hike happening this year in May 2022. Keeping the Repo rate too low when the economy is showing strong traction, can create asset bubbles and overheat the economy, which can in turn lead to hyperinflation, eventually. In fact this is exactly what the US and UK did–they kept rates too low for too long, with the result that both these economies are now grappling with 9.1 per cent inflation.

Bank of England (BoE) sees inflation breaching 13.3 per cent in the UK by the end of 2022, with the UK slated to enter recession. The USA is already in recession technically speaking, with GDP contracting by 1.6 per cent and 0.9 per cent in the March 2022 and June 2022 quarters respectively. Clearly, while most big nations are struggling in the aftermath of two Black Swan events, namely the COVID pandemic and the Russia-Ukraine conflict, India under the astute leadership of Prime Minister Narendra Modi, stands tall as an oasis of economic stability, amidst geopolitical shocks and financial mayhem, worldwide.

Of late, there has been a massive outcry that a hike in Repo rate will mean more expensive, equated monthly installments (EMIs). What are the factors that Influence your home loan interest rate? EMIs help you pay back the principal and interest amount in a way that does not impact your monthly budget. However, this will depend a great deal on the interest rate. There are many factors that influence the interest rate which will vary from lender to lender. The key factors influencing home loan rates are the MCLR rate, type of interest, loan-to-value (LTV) ratio, credit score and tenure of the loan.

MCLR is the marginal cost of funds’ based lending rate. MCLR is the threshold or minimum level below which a bank cannot lend at. MCLR depends on other factors  such as operating cost, marginal cost of funds, the cash reserve ratio (CRR) for banks,which currently is 4.5 per cent and any negative carry on it. There is an annual reset date for the MCLR during which banks review the rate for existing home loan borrowers. The MCLR on the reset date remains applicable until the next year’s reset date, even if there are changes to the Repo rate in the interim. This basically means that your interest rate will increase or decrease based on the changes in the MCLR rate and not necessarily the Repo rate.

Of course, a hike in the Repo rate leads to a hike in the MCLR and therefore a hike in EMIs too, but the hike in EMIs is not in the same proportion, but by a much smaller degree. Also,changes in MCLR, post a change in Repo rate,do not happen immediately but often with a lag of a few months. Hence all those self styled opinion makers and economists who claim that a hike in Repo rate will be automatically followed by a hike in EMIs in the same proportion,are completely wrong.

Also, you can choose between a fixed rate, floating rate, and mixed interest rate. Floating interest rates change based on changes by the Reserve Bank of India (RBI). If the latest RBI norms result in lower interest rates, then your EMIs will be lower and vice versa. With a fixed interest rate, you get the same rate of interest throughout the tenure of your loan. Loans with mixed interest rates start off with a fixed rate of interest for a specific time period and then switch over to a floating interest rate. So again, the long and short of this argument is the fact that a Repo rate hike only impacts variable,not the fixed rate,loans.

Speaking of loan to value (LTV) ratio, it refers to the percentage of the property value that can be financed through the loan. A larger quantum of loan attracts a higher rate of interest because it is a higher credit risk. Putting down a larger down-payment can help bring down the quantum of loan,which in turn will reduce the interest rates as well.

Credit score also has a significant impact on  lending rates. Your credit score is a statement of your repayment history, financial discipline and your creditworthiness. A lower credit score portrays a high credit risk, which would cause lenders to charge a higher rate of interest in order to cover their risks. A higher credit score, on the other hand, shows a lower credit-risk individual which would encourage lenders to be more willing to offer lower interest rates.Again,loans with a shorter tenure attract a lower rate of interest (even if the EMIs are higher) compared to loans with a longer tenure (which will have lower EMIs but a higher interest rate).

The factors listed above are the major factors that influence the interest rate on your home loan. While some of these are within your control, others are influenced by the economy.

Post the Repo rate hike on 5 August 2022, the Opposition and fake intellectuals have been harping about how home loans, car loans and personal loans will now become more expensive. The truth however is, if you have taken a home loan on or after 1 April 2016, you automatically come under the purview of the MCLR regime and not the “Base Rate” regime. Also, a hike in Repo rate will lead to higher interest rates that will now be available on fixed deposits, term deposits and other debt paper, which in turn, will be a significant income booster for those who largely invest their savings in short term deposits, debt instruments or bank FDs.

Under an incompetent Congress, the bank rate in February 2012 was 9.5 per cent, while the Repo and reverse Repo rates were a steep 8.5 per cent and 7.5 per cent respectively.Bank rate has lost its significance as a monetary policy tool, as the RBI currently signals changes in policy stance through changes in Repo rate,which is the rate at which banks borrow short-term funds from RBI. Reverse Repo is the rate at which banks lend to the RBI. Bank Rate, is the standard rate at which RBI buys or re-discount bills of exchange or other commercial paper and is used more as a penal rate which the banks have to pay for their failure to meet the mandatory Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements.Bank Rate is merely used by several organisations as a reference rate for indexation purposes.

Marginal Standing Facility (MSF) is the rate at which the RBI offers money to the scheduled commercial banks that are facing a shortage of liquidity. This rate differs from the Repo rate and the banks can get overnight funds from the Reserve Bank of India by paying the MSF rate. The current MSF rate is 5.65 per cent and is aligned with the Bank rate which is also 5.65 per cent.

In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the standing deposit facility (SDF), an additional tool for absorbing liquidity without any collateral. The SDF is basically a mechanism which gives banks an option to park excess liquidity with the RBI. It is different from the Reverse Repo facility in that, it does not require banks to provide any collateral to the RBI while parking funds. The SDF was launched on 8 April 2022, at a rate of 3.75 per cent but now the SDF rate is 5.15 per cent.

Introduction of collateral free SDF as the lower threshold rate in the liquidity adjustment mechanism (LAF) corridor,has been an excellent measure in strengthening the operating framework of the banking system. Access to the SDF will be at the discretion of banks and it will be available on all days of the year after market hours.

To cut to the chase, Repo, Reverse Repo, Bank rate, MSF and SDF are at the end of the day, all liquidity management tools, aimed at sucking out excess liquidity from the system and thereby taming inflation. From surplus liquidity of Rs 8.5 lakh crore in April 2022, the figure has now fallen to Rs 3.8 lakh crore, signifying how both the RBI and the government are working in tandem to curtail inflation. Inflation, at the end of the day, is about too much liquidity chasing too few goods. Hence containing excess liquidity via hikes in the Repo rate in a calibrated manner, without hurting growth, is the need of the hour and that is precisely what the RBI is doing.

Inflation is the most regressive form of taxation but to the Modi government’s credit, despite unusually challenging global circumstances, it has managed to contain average retail inflation in the last eight years at 4.9 per cent, versus 8.4 per cent under Congress-led UPA and an abnormally high 10.49 per cent under the Congress-led PV Narasimha Rao government.

Over Rs 23 lakh crore given to the needy in the last eight years via the direct benefit transfer (DBT) mechanism, is a classic example of how Prime Minister Modi’s government has judiciously combined both welfarism and reforms at a time when the global financial order is seeing cataclysmic changes.

The author is an economist, national spokesperson of the BJP and the bestselling author of ‘The Modi Gambit’. Views are personal.

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