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, 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, remain same throughout the tenure. However, some retail loans, including home loans and auto 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 Loan EMI Increase?
For existing home loan borrowers, the equated monthly instalment or EMI is set to increase. Assume, you have a home loan of Rs 30 lakh outstanding with a tenure 20 years at 7.05 per cent interest rate per annum. At present, you have a EMI of Rs 23,349.
If the interest rate jumps by 50 basis points or 0.5 per cent, then your EMI will rise to Rs 24,260.
For a home loan of Rs 50 lakh outstanding at 7.05 per cent interest rate for 20 years, the EMI will go up to Rs 40,433 from existing Rs 38,915.
“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 external benchmark based lending rate (EBLR) regime,” said Suvodeep Rakshit , senior economist , Kotak Institutional Equities.
Impact of 50 Bps Repo Rate Hike on Various Home Loan Amounts Linked to Repo Rate
Source: Paisabazaar.com
Impact of 50 Bps Repo Rate Hike on Various Car Loan Amounts Linked to Repo Rate
Source: Paisabazaar.com
How Will Repo Rate Hike Impact Loans?
When RBI raises repo rate, the banks keep the EMI constant for the existing borrowers and increase the tenure of the loan. This will impact the interest charged on the loan. Those loans linked with marginal cost of funds based landing rate may not feel the pinch of repo rate hike immediately. “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.
“It is evident that home loan interest rate hike will impair the home buying rally as pay out in terms of EMI is scheduled to rise. But according to me this crater in demand sentiment is a makeshift move, as home loans are based on floating rate for a long tenure. The EMI constraint will be eased as rates are expected to normalise once the global situation is stabilised,” said Niranjan Hiranandani, vice chairman.
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