RBI Rate Hikes & Fuel Costs Set to Squeeze Indian Family Budgets This Festive Season

Mumbai, October 26, 2023 – Indian families are bracing for tighter budgets and increased financial strain this week as the ripple effects of the Reserve Bank of India's (RBI) recent repo rate hike combine with stubbornly high fuel prices and persistent food inflation.

Experts warn that the dual pressure points will directly translate into higher EMIs for home and auto loans, while simultaneously eroding the purchasing power of the average household, making the upcoming festive season a more fiscally cautious affair.

Key points

* The Reserve Bank of India's latest repo rate increase is set to push up equated monthly instalments (EMIs) for millions of home and auto loan borrowers.

* Families continue to battle persistent inflationary pressures, particularly on essential food items like vegetables, pulses, and edible oils, squeezing daily budgets.

* Despite some global price moderation, domestic petrol and diesel prices remain a significant concern, driving up transport costs and the prices of goods.

* Discretionary spending is expected to decline as households prioritise essential expenses, potentially impacting consumer-driven sectors ahead of major festivals.

The Monetary Policy Committee (MPC) of the Reserve Bank of India recently announced a 25 basis point hike in the benchmark repo rate, taking it to 6.50%.

This marks the sixth consecutive rate hike since May 2022, pushing the cumulative increase to 250 basis points.

The central bank's primary objective remains taming inflation, which has consistently stayed above its comfort zone of 2-6% for much of the past year.

While the RBI's move is aimed at anchoring inflation expectations and ensuring price stability, its immediate impact is being felt directly by borrowers across the nation.

For millions of Indian families, particularly those with existing home loans, car loans, or other retail loans linked to external benchmarks, the rate hike means an almost immediate increase in their Equated Monthly Instalments (EMIs).

Banks typically pass on these rate changes to customers with floating interest rate loans, either by increasing the EMI amount or by extending the loan tenure.

New borrowers, too, will face higher interest rates, potentially dampening demand for fresh credit.

“The latest rate adjustment by the RBI, while necessary to tame inflation, will undeniably lead to an upward revision in lending rates,” stated **Mr.

Raghav Sharma, Chief Economist at Bank of Baroda**. “Borrowers on floating rate regimes should prepare for a marginal increase in their EMIs, and new borrowers will face higher initial rates.

It’s a delicate balancing act between controlling inflation and supporting economic growth, with households bearing some of the immediate brunt.”

Beyond loan repayments, families are grappling with the relentless march of inflation on essential goods.

The latest Consumer Price Index (CPI) data, though showing a slight moderation from its peak, indicated retail inflation hovering around 6.8% for September, primarily driven by food and fuel components.

The prices of common vegetables like tomatoes, onions, and potatoes, along with pulses and edible oils, have seen significant spikes in local markets, forcing households to recalibrate their grocery budgets.

**Ms.

Priya Singh, Secretary of the Consumer Rights Forum**, voiced concerns for the common man. “Families are already stretched thin.

They’re cutting back on non-essentials, and now higher EMIs mean even less disposable income.

The government needs to step in with more direct relief measures, perhaps targeted subsidies, to protect the most vulnerable from this relentless squeeze on their purchasing power.”

Fuel prices continue to be another major determinant of household expenses and overall inflation.

Despite some softening in international crude oil prices, domestic petrol and diesel prices have remained largely stable at elevated levels due to central and state taxes.

This stability, while preventing further increases, means transport costs for commuters and goods alike remain high.

The cascading effect is seen in everything from daily commutes to the cost of bringing produce from farms to mandis, ultimately adding to the final price paid by consumers.

For instance, a marginal increase in diesel prices directly impacts logistics costs for businesses, which is then passed on to consumers through higher prices for food, packaged goods, and even online deliveries.

This indirect inflation can be even more insidious, as it affects nearly every aspect of household consumption.

Background

The current economic scenario is a confluence of global and domestic factors.

Globally, lingering supply chain disruptions from the pandemic, coupled with the geopolitical fallout of the Russia-Ukraine conflict, have kept crude oil prices volatile and commodity prices elevated.

Major central banks worldwide have embarked on aggressive rate hike cycles to combat inflation, influencing the RBI's own policy trajectory.

Domestically, a robust post-pandemic demand recovery initially contributed to inflationary pressures.

Uneven monsoon patterns in some regions have also impacted agricultural output, particularly for certain food items, leading to price volatility.

The RBI's mandate under the monetary policy framework is to maintain price stability while keeping in mind the objective of growth.

Its recent actions are a testament to its commitment to bringing inflation within the target band.

What it means

For the ordinary Indian family, the implications are profound and immediate.

Higher EMIs mean a larger chunk of their monthly income will be diverted towards debt servicing, leaving less disposable income for other expenses.

This will likely lead to a re-evaluation of household budgets, with discretionary spending on leisure, entertainment, and non-essential purchases taking a backseat.

Families might defer plans for big-ticket purchases like new appliances, vehicles, or even home renovations.

Savings rates could also be impacted as families prioritise immediate consumption needs over long-term financial goals.

This could potentially slow down the consumption-driven growth that India has enjoyed.

Reactions

The banking and real estate sectors anticipate a slowdown in demand for new loans and properties, respectively, given the increased cost of borrowing. **Dr.

Alok Mitra, Senior Fellow at the Indian Council for Economic Relations**, commented, “This is a classic 'hard choice' scenario for the central bank.

While growth impulses remain robust, unchecked inflation can be far more damaging in the long run.

The policy aims to cool demand and bring price stability, but the immediate impact on household budgets is unavoidable.”

Public sentiment, particularly on social media, reflects a growing concern over the rising cost of living, with many citizens expressing anxiety about managing household finances.

There are calls for more targeted government interventions to protect household budgets, especially with key festivals like Diwali and Christmas approaching, traditionally periods of increased consumer spending.

What happens next

The RBI has signalled that its future monetary policy actions will remain data-dependent, implying that further rate hikes cannot be entirely ruled out if inflation remains sticky or if global economic conditions worsen.

Analysts will closely watch incoming inflation data, particularly for food and core inflation components, as well as global crude oil prices.

Families are advised to review their financial commitments, explore options for refinancing loans if advantageous, and adopt stringent budgeting practices.

The government’s fiscal policy, including any potential measures to manage food prices or fuel taxes, will also play a crucial role in shaping the economic environment for households in the coming months.

The focus for many will be on resilient financial planning to navigate these challenging economic headwinds.