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    HomeBusinessRepo rate hike: Demand may take a knock

    Repo rate hike: Demand may take a knock

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    Both corporate and consumer loans will become pricier after the Reserve Bank of India (RBI) on Wednesday hiked the repo rate by 50 bps to 4.9%.

    The jump in interest costs for retail households and micro, small and medium enterprises (MSME) could lead to contraction in demand of as much as Rs 45,000 crore. According to Soumya Kanti Ghosh, chief economist, State Bank of India (SBI), every 1 basis point increase in the repo has an impact of around Rs 305 crore on interest costs for retail & MSME consumers. “Should the terminal repo rate go to 5.75%, this would add up to an annualised Rs 45,000 crore. If incomes don’t go up, this means a contraction in demand of a similar amount,” he said.

    Both corporate and consumer loans will become pricier after the Reserve Bank of India (RBI) on Wednesday hiked the repo rate by 50 bps to 4.9%.

    “Given about 75% of the book is linked to either an external benchmark or deposit costs, interest rates are likely to go up,” Dinesh Khara, chairman, SBI, told a TV channel.

    As of December 2021, nearly 40% of all floating rate loans in the banking system were linked to external benchmarks, 53% to the MCLs and a little over 5% was linked to the base rate. Approximately, 60% of housing loans were linked to external benchmarks, including the repo rate.

    RC Bhargava, chairman, Maruti Suzuki India, told FE that costlier loans would adversely impact two-wheelers where demand was weak, though for passenger vehicles it might not make much of a difference.

    Costlier loans, coupled with rising home prices, could upset the momentum in the real estate space. Rohit Gera, MD, Gera Developments, said the higher borrowing costs will hurt developers who are already facing severe margin pressure on account of inflation in raw material prices.

    “The interest rate hike would impair home purchases as EMIs will go up,” Niranjan Hiranandani, MD, Hiranandani Group, said. However, he added, that the impact may be temporary since home loans are based on a floating rate for a long tenure and rates could normalise once the global situation stabilises.

    Federation of Automobile Dealers Associations (Fada) president Vinkesh Gulati said while the PV segment may be able to absorb the higher cost of loans, the two-wheeler segment, which has been stressed due to weak rural demand, costlier vehicles and high fuel costs, will not be able to take the blow. “Higher interest would make it more expensive to own a vehicle,” Gulati said.

    Great Eastern Retail’s director Pulkit Baid believes the rate hike is unlikely to hurt demand for consumer durables as the cost of loans would not go up too much.

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