RBI hikes repo rate: What it means for your loans
What's the story
The Reserve Bank of India's (RBI) decision to raise the repo rate by 25 basis points to 5.5% has a major impact on borrowers and savers. The move comes after a long period of easing, and while it could make loans more expensive, it also gives banks an opportunity to offer better returns on new fixed deposits (FDs). The immediate effect will be most evident for those with floating-rate home loans and other loans linked to external benchmarks.
Loan implications
Increased EMIs for floating-rate home loans
The RBI's repo rate hike could lead to an increase in monthly EMIs for borrowers with floating-rate home loans.
For instance, on a ₹50 lakh home loan with a 20-year tenure, a 25-basis-point increase in interest rate could push up the monthly EMI by around ₹780.
However, this will depend on the lender and the current interest rate.
Choices
Borrowers have 2 options
When rates go up, borrowers are left with two options: either pay a higher EMI or let the loan tenure increase while keeping the EMI more or less unchanged.
The impact of this decision will depend on factors such as the outstanding principal amount of the loan, remaining tenure, interest rate, and lender's reset mechanism.
Borrower impact
Who will be affected the most?
Borrowers with loans linked to an external benchmark like the repo rate will be most affected by the RBI's decision.
When this benchmark rises, lending rates usually follow suit, increasing the cost of servicing these loans.
Fixed-rate borrowers are generally insulated from such hikes for the duration of their fixed-rate period, depending on their loan agreement terms.
Loan costs
Impact on other loans and debts
The RBI's repo rate hike could also make floating-rate personal loans, auto loans, and other credit products more expensive as banks reprice lending rates.
This means that the cost of taking on new debt could rise for prospective borrowers.
Existing borrowers should check if their loan is linked to an external benchmark and when the next reset is due.
FD impact
Good news for savers
For savers, the RBI's decision could be a positive development.
Banks may gradually raise interest rates on new FDs as the cost of funds rises and competition for deposits intensifies.
However, this transmission is unlikely to be immediate or uniform across banks.
Existing FDs usually continue to earn the rate applicable when booked until maturity, meaning the immediate benefit of higher rates will likely go to investors putting fresh money into FDs or renewing maturing deposits.