The Reserve Bank of India (RBI) has increased the repo rate by 50 basis points to 4.9 per cent in its June Monetary Policy Committee (MPC) meeting. Earlier in May, the central bank had raised the repo rate by 40 basis points in a surprise move to tame inflation. The latest hike of repo rates will impact existing and new retail loan borrowers with floating interest rates.
RBI Hikes Repo Rate: What it Means for Borrowers
Repo rate is the rate at which commercial banks borrow money from the Reserve Bank of India. If the central bank increases repo rate goes up, the cost of borrowing for retail and other loans by the banks, also rises.
The interest rates for fixed rate loans, such as personal loans and auto loans, remain same throughout the tenure. However, some retail loans, especially home loans are linked to an external benchmark set by the Reserve Bank of India. Most of the banks and non-banking financial companies (NBFCs) have linked their lending rates to the repo rate fixed by the central bank. So, when the repo rate goes up, the repo rate linked lending rate (RLLR) of banks also increases.
Two back-to-back hike in repo rate will have an immediate impact on borrowers. Banks are required to reset the interest rates at least once in three months.
How Much Will your EMI Increase?
For existing home loan borrowers, the equated monthly instalment or EMI is set to increase. Assume, you have a home loan with Rs 35 lakh outstanding with a tenure 20 years at 7.1 per cent interest rate per annum. Your have a EMI of Rs 27,346.
If the interest rate jumps by 50 basis points or 0.5 per cent, then your EMI will rise to Rs 28,410.
“With around 40 per cent loans’ rates in the banking system linked to external benchmarks, as the RBI hikes the repo rate, cost of borrowing will keep increasing. Retail loans such as home loans are mostly linked to external benchmarks and will see a pass-through of higher policy rates. Amongst banks private sectors have a relatively larger share of loans which are In the EBLR regime,” said Suvodeep Rakshit , senior economist , Kotak Institutional Equities.
Loans which are not linked, will also see a gradual increase, especially as the RBI continues to tighten liquidity available in the banking system, he added.