🚨 The RBI Hates Low EMIs

Welcome to this week’s issue of Altsights! 

✅ Election results are out
✅ The market is finding its footing
✅ The RBI released yet another monetary policy that ensures your EMIs are not going down any time soon

Here's What's in Store for You Today:

• The Big 3️⃣ Numbers

• The Curious Case of Sky-High EMIs 🤷🏻‍♂️

• Reader’s Spotlight💡

The Big 3️⃣ Numbers  

The Curious Case of Sky-High EMIs 🤷🏻‍♂️

India is one of the few major economies that are witnessing rapid economic growth.

✅ GDP growth of 8.2% in FY24
✅ India’s banks are strong
✅ The government’s finances are in fine shape

Last year, India overtook the UK to become the world's fifth-largest economy.

So why are loan EMIs still sky-high despite the economy being in great shape?

For the average Indian, who relies heavily on loans for housing, education, and other needs, the question looms large – why aren’t these loan rates and EMIs decreasing in our strong economy?

For instance, between May 2022 and February 2023, home loan interest rates rose sharply by over 20%.

Who decides loan rates and EMIs? 📈

Interest rates in India are primarily influenced by the repo rate, which is set by the Reserve Bank of India (RBI).

The repo rate has been at 6.5% since Feb 2023. This is the joint highest repo rate in the last 8+ years.

On Friday, the RBI, for the 8th time in a row, said that the repo rate will remain unchanged.

The RBI knows that lowering the repo rate will result in lower EMIs on loans. Yet our central bank has chosen to keep the repo rate unchanged. Why?

Why does the RBI want to keep your EMIs high? 😑

Despite a perfectly good economy, the repo rate (that affects your EMIs) is high for several reasons:

1. Focus on inflation control: The RBI aims to maintain price stability, with the current inflation forecast for FY25 set at 4.5%. The central bank is committed to bringing inflation down to its target value of 4%.

   

   Note the persistently high food inflation

2. High food inflation: High food inflation persists even as prices in other categories, such as fuel, have moderated.

3. Slowing private consumption: Private consumption has grown by only about 3% during FY24, compared to 6.8% during FY23. This slowdown in consumer spending is a key concern for the RBI.

4. Confidence in economic growth: The GDP growth projection for FY25 was increased to 7.2% from the previous 7%. This means an intervention like cutting interest rates is not required to stimulate the economy.

5. Guard against geopolitical uncertainties: The RBI is also considering global economic conditions (like ongoing wars) that could impact oil prices and subsequently domestic inflation.

If you were not able to gather why any of the above are stopping the RBI from cutting interest rates, you should read the next section 👇🏼

What would happen if the RBI cuts rates? 🤔

Let’s suppose the RBI decides to reduce the repo rate. Here’s what would transpire:

As you can see, lowering the repo rate results in increased borrowing and drives up inflation. To prevent this cycle, the RBI has retained the repo rate at 6.5%.

But, can we expect relief in the future? 🥲

The direction of key economic indicators and experts suggest that a repo rate cut by the RBI is likely later this year.

As inflation stabilises and global central banks begin to lower their rates, India is likely to follow suit​​.

A rate cut would provide much-needed relief to borrowers, boosting affordability and stimulating the economy.

Reader’s Spotlight💡

Last week, Amit from Pune asked:

Like Amit, are you too curious about personal finance and investing?

I’d love to hear from you!

Simply reply to this email with your question. Each week, I'll select the most insightful question and answer it for everyone’s benefit.

So, go ahead and ask. I can't wait to engage in meaningful conversations!

Before I wrap up, here’s an interesting conversation I had with Sayali of Fincocktail on personal finance and investing. Do check it out.

Cheers,
Madhu,
Founder, Altcase