India’s Reserve Bank of India (RBI), in an off-cycle monetary policy review meeting, hiked the Repo rate by 0.40%- the first such hike in nearly four years as headline CPI inflation in March 2022 sharply accelerated to 7 percent.
An increase in repo rate implies that banks will also increase their lending rates, in particular, the home loan interest rates, which further implies an uptick in EMIs for borrowers. In short, the days of ultra-low interest rates are now over.
This is why the RBI governor’s decision shocked the markets, with the BSE Sensex swinging over 1,500 points intra-day before ending the session with a loss of nearly 1,307 points.
For floating-rate bank loans taken after October 2019, there will be an increase of 40 bps in the rates at the next rate reset date as mentioned in the loan agreement.
“A floating rate is quoted as a bank margin % over the benchmark. Hence when the base benchmark, here the Repo rate, is increased by 0.040% the floating loan interest rate also goes up by the same amount. It is to be noted that fixed-rate retail loan- the rate will not be affected. Typically, at the time of sanction is about 1.5% to 2% higher than the floating interest rate risk to the lender,” said Chaitali Dutta, with Personal decades of experience.
“for example, on a home loan of Rs 50 lakh for 20 years at 7% the EMI is Rs 38,765 and the interest is Rs 43.03 lakh. If the rate increase to 7.4%, the EMI becomes Rs 39,974 and the interest Rs 45.93 lakh. Your EMI is set and it may not increase but the number of EMI’s you pay may increase. To tackle this hike, you could refinance to a lower rate, increase your EMI’s and make pre-payments regularly,” explained Adhil Shetty, CEO, Bankbazaar.
On a general note, if you have a car loan or a personal loan even a home loan that has less than 5 years of tenure remaining, the loan has to run for a longer period like 10 years and beyond, then you may consider a loan transfer to another provider where part of the interest rate hike may be absorbed by the new lender, Dutta added.
Interest rates on deposits are now expected to move upwards, bringing some relief to the common man. With the regime of low-interest rates coming to an end, one is better off opting for a shorter-term FD, so that your deposit is not locked at a lower rate for long.