Context:

• The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) increased the repo rate by 25 basis points to 6.25%.
• The MPC arrived at the unanimous decision as the outlook for inflation had become ‘uncertain’ following a surge in international crude oil prices.
• This is the first rate hike in four-and-a-half years; the last was in January 2014.

Interest rates may go up

• Crude oil prices have been volatile and this imparts considerable uncertainty to the inflation outlook — both on the upside and the downside.
• The central bank also observed that inflation expectations were on the rise, evident from its survey of households.
• While the central bank has increased the inflation projection, it has maintained the ‘neutral’ stance for monetary policy, meaning interest rates can move either way.
• The outlook for GDP growth for 2018-19 has been retained at 7.4% as projected in the April policy. GDP growth is projected to be in the range of 7.5-7.6% in H1 and 7.3-7.4% in H2, with risks evenly balanced.

Lets make it simple:

• Repo rate is the rate at which RBI lends money to all the banks. So if RBI hikes its repo rate, it becomes costly for banks to borrow money from RBI so they in turn hike the rates at which customers borrow money from them to compensate for the hike in repo rate.
• Interest rate for common man will be repo rate plus the rate of interest on which he took the loan from the bank. So, if repo rate increases the interest rate of the loan will also increase. Thus increasing the EMI.
• For example: If you had bought a house worth 30 lacs @10% interest, 15 yrs tenure, then the EMI would be Rs 32,238. With an increase of 0.25% in interest, your EMI will rise to Rs 32698.53.

Source:TH