RBI Repo Rate Hike: In a new financial plot twist before the year ends, the Reserve Bank of India announced a shocker yesterday. RBI has raised its benchmark repo rate by 25 basis points, making it 5.50%. This change has taken place after four years.
The decision of RBI to raise the repo rate has put household finances on a slightly tighter leash. For home loan borrowers, the hike could mean higher interest costs, steeper EMIs or a longer loan tenure.
For everyone who is saving in FDs, there is a silver lining, fresh fixed deposits (FDs) could offer better returns as banks adjust their deposit rates. After the four-year no-change stance from 2023, this is a “calibrated tightening” stance from neutral.
Borrowers may feel the pinch, while savers could finally have a reason to smile. Let's decode it for everyone, so it becomes easy to understand.
How Will The RBI's Repo Rate Hike Affect Home Loans?
Did you know a small hike in repo rate could make a bigger difference? A repo rate hike can make home loans a little less easy on the pockets of borrowers. The hike in repo rate is going to especially affect those with floating-rate loans.
Most of the new retail loans are linked to an external benchmark. So, when the RBI raises the benchmark, the interest rate on repo-linked loans will also rise. This also depends on the lender’s spread and loan terms. Although borrowers may not feel the impact immediately, you should know what could be the change.
External benchmark-linked loans are reset periodically. Therefore, borrowers should check their loan agreement and reset date to understand when the higher rate could affect their borrowing cost.
How Will The Repo Rate Hike Affect EMIs?
As the hike in interest will push the home loan interest rate, a higher interest rate can also increase the overall cost of borrowing. This will make your home loan EMI feel a little heavy.
The banks may adjust the EMI, loan tenure, or both, depending on the borrower’s circumstances.
It becomes easy with this consideration, you can either opt for a high amount or longer time. This means, if the EMI remains unchanged, the loan tenure could increase. This means borrowers may take longer to repay the loan and could end up paying more interest over time. The monthly payment may look the same, but the loan journey could become longer.
Borrowers can also consider part-prepayments, subject to their lender’s terms, to reduce the outstanding principal and overall interest burden.
Home Loans vs FDs: Who Benefits After Repo Rate Hike?
The repo rate hike creates a mixed impact. Home-loan borrowers may face higher borrowing costs, while savers could benefit from potentially better rates on new or renewed FDs.
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Financial Product
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Likely Impact
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Floating-rate home loan
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Higher interest cost
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MCLR-linked loan
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Gradual impact
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New FD
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Potentially higher returns
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Existing FD
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No change until maturity
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