What does interest rate rise mean for mortgages and savings?

RBI raises key policy rate by 25 bps to 6.50%, holds stance at neutral

The Reserve Bank of India (RBI) on Wednesday announced a 25 basis points hike in repo rate to 6.5 per cent. The reverse repo rate was also raised by 25 basis points, to 6.25 percent.

The rate at which the RBI borrows money from commercial banks stands adjusted to 6.25%.

The latest policy decision could translate into higher equated monthly instalments (EMIs) for home, auto and other loans, if the banks pass on the burden to borrowers.

He said: "Rates can be expected to rise gradually".

The MPC baulked at a rate rise earlier this year after the economy dipped as a result of the extreme winter weather caused by the "beast from the east".

While savers may be hoping for better returns, Bank of England statistics show that the average interest rate on United Kingdom current accounts increased by only 0.09% in the seven months since rates were increased by 0.25% past year.

When the Bank Rate goes up, so should rates on mortgages and savings accounts.

National president of Confederation of Real Estate Developers Associations of India'(CREDA) Jaxay Shah, who was also part of the meeting, said, "Two consecutive hikes in the repo rate partially undo the policies for promoting affordable housing".

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In theory, an interest rate rise is good news for savers, who should see a higher return for their investment.

The central bank has pegged the retail inflation at 4.8 per cent for the second half of the ongoing fiscal anticipating increase in food prices due to hike in minimum support price (MSP).

Killol Pandya, Head, Fixed Income, Essel Mutual Fund, said, while market is discounting a rate hike, he believes it is a touch-and-go matter with nearly even probability of rate action. This is the second time in a row that the RBI has hiked its key lending rate.

He said the final Brexit deal was "potentially the most important" factor that would influence monetary policy in the coming months and years, and added that the Bank was ready for all outcomes.

However, just like the rise in November, providers are likely to be selective with the rates they choose to increase.

The Bank's nine rate-setters were unexpectedly unanimous in their vote to raise rates to 0.75% from 0.5%. "Although underlying tone of RBI statement appeared balanced, inflationary risks and outlook highlighted by the central bank indicates hawkishness". The RBI has forecasted a mildly rising inflation trajectory - 4.8% in H2FY18 and 5% in Q1FY20.

However, lower-than-expected inflation figures - unchanged at 2.4% in June - and weak wage growth had placed a question mark over the increase for some.

He confirmed the prospect for further rises as he said if rates stayed at 0.75%, inflation would remain above 2% throughout the forecast horizon. The calculation is based on a standard variable rate of 3.99% on a £250,000 20 year mortgage and a tracker rate 2% above the Bank rate.

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