RBI may hike interest rates in October: Will loans and EMIs get costlier?

The Reserve Bank of India (RBI) could raise interest rates at its October Monetary Policy Committee (MPC) meeting, a move that may put borrowing costs and loan EMIs in focus for households and businesses. However, any rate-hike cycle is expected to be limited, according to a report by Emkay Global Financial Services.

The changing domestic and global economic environment has increased the chances of an RBI rate hike in October, Emkay said. The brokerage expects the central bank to keep any tightening cycle shallow, while continuing to focus on managing liquidity and foreign exchange conditions.

Why is the RBI considering a rate hike?

Emkay identified three developments that have changed the interest-rate outlook.

One of them is the sharp rise in Foreign Currency Non-Resident (FCNR) inflows, which have reached around USD 136 billion, well above earlier expectations. The inflows have contributed to a substantial increase in liquidity in the financial system.

The report said the RBI is looking to drain excess liquidity of around Rs 4.3-4.7 lakh crore resulting from FCNR inflows. A rate hike could help bring the central bank's monetary policy stance more closely in line with its liquidity management measures.

Another major factor is the rise in crude oil prices. Brent crude has moved above USD 100 a barrel amid renewed tensions in the Middle East, raising concerns over possible disruptions to oil supplies and key shipping routes.

At the time of reporting, Brent crude was trading at around USD 107.06 per barrel, while crude oil was at around USD 102.92 per barrel. Brent had earlier climbed about 3.2 per cent to around USD 108 a barrel, while West Texas Intermediate (WTI) also gained 3.2 per cent to about USD 103.30 a barrel.

Global interest rates are also turning tighter

The RBI's rate outlook comes as other major central banks are also moving towards tighter monetary policy.

The European Central Bank (ECB) raised interest rates last week, while the US Federal Reserve and the Bank of Japan are also expected to raise rates.

Against this backdrop, Emkay described the RBI's October MPC meeting as a “live” one, with the possibility of a rate increase now considerably higher than earlier.

Will home loans and EMIs become more expensive?

A rate hike would put borrowing costs in focus, particularly for consumers with loans linked to floating interest rates. However, the Emkay report expects any RBI rate-hike cycle to be shallow, meaning the impact would depend on the size and duration of any tightening.

For borrowers, the key development to watch will therefore be the RBI's October policy decision and the scale of any potential rate increase.

The central bank's broader focus is expected to remain on managing excess liquidity and foreign exchange conditions, even if it begins raising interest rates.

Emkay said the RBI could use the rate increase to align its monetary policy and liquidity stance as it works to absorb the excess liquidity created by the strong FCNR inflows.

With ANI inputs