The Reserve Bank of India (RBI) raised the repo rate by 50 basis points to 5.40 percent today, returning it to pre-Covid levels. The RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) raised the policy repo rate for the third time in a row on Friday, aiming to contain inflation by squeezing market liquidity.
According to investment experts, the Indian central bank’s decision will help keep inflation under control, and new bank depositors can expect a higher return on their money. They did, however, warn that the RBI rate hike could be costly for new loan borrowers as well as existing Repo Rate-linked long-term retail loans.
Jitendra Solanki, a SEBI-registered tax and investment expert, explained how the RBI’s decision to raise interest rates will affect one’s retail loan EMIs and bank fixed deposits (FDs) “Following the increase in key interest rates by the RBI, banks are expected to raise interest rates on retail loans such as personal loans, home loans, auto loans, and so on. As a result of the RBI’s rake hike in the third consecutive MPC meeting, one’s EMI on a home loan, car loan, bike loan, and so on are expected to rise. Banks, on the other hand, are expected to raise interest rates on bank deposits such as bank FDs and other term deposits. As a result, the decision is bad for borrowers but good for depositors.” According to a SEBI-registered expert, the move is intended to contain inflation, and banks are expected to raise interest rates on both retail loans and bank deposits in the near future in order to squeeze money out of the market.
The increase in interest rates on long-term retail loans is expected to affect some existing borrowers as well. “Interest rate hike on long-term retail loans will impact some existing borrowers’ monthly EMI as well as these days banks are giving Repo Rate linked retail loans and in that case banks restructure the long-term loan, especially home loan and auto loan,” said Manikaran Singhal, Founder at Goodmoneying.com. So, if a bank decides to raise interest rates on long-term retail loans, the monthly EMI of home loan, auto loan, and other long-term loan borrowers is expected to rise if their loan is linked to the Repo Rate.”
Anuj Puri, Chairman of ANAROCK Group, commented on how the RBI’s move will affect home loans “A rate hike was anticipated, but only up to 35 basis points. The 50 basis point increase is clearly on the higher side, and home loan lending rates will now move further into the red zone.” He stated that the repo rate has now reached pre-pandemic levels, at 5.4 percent. While inflation has moderated somewhat since the April surge, it remains above the RBI’s target.
“This is the third consecutive rate hike in the last two months, signalling the end of the all-time low-interest rate regime, which has been a major driver of housing sales across the country since the pandemic. This double whammy coincides with the inflationary trends in primary raw materials, such as cement, steel, and labour, which have recently led to a rise in property prices. Rising home loan rates and construction costs, taken together, will have an impact on residential sales, which performed reasonably well in the first half of 2022 “ANAROCK’s Anuj Puri stated.
“Keeping current home loan interest rate is around 6%,” Manikaran Singhal of Goodmoneying.com said of how one’s home loan EMI will change if banks decide to raise home loan interest rates by 50 basis points. If a borrower is granted a home loan of 35 lakh for a period of 20 years, the monthly EMI at 6% is around 25,000, whereas if the home loan interest rate is raised by 50 basis points in the future, the monthly EMI will be around 26,000. As a result, this 50 basis point increase in home loan interest rates will cost around $1,000 per month. He stated that the EMI increase will also affect existing borrowers whose home loan interest rate is flexible with the RBI’s Repo Rate.