The Reserve Bank of India RBI is expected to increase the repo rate, which is the rate at which commercial banks borrow from RBI after the rise in interest rates in the US. The repo rate may be hiked by the central bank by 0.50 per cent, or 50 basis points, according to experts. The policy announcement is to be made on Friday, September 30, 2022, and will start tomorrow at the Monetary Policy Committee MPC meeting.
People who have taken out loans at floating interest rates are likely to be affected by the rise in repo rates. When the cost of borrowing increases for banks, it leads to a proportionate rise in lending rates by banks, which may lead to a costlier car, personal and home loans.
RBI has increased the repo rate three times since May. The key policy rate has gone from 4 per cent to 5.40 per cent during this period. If RBI increases rates by 50 bps in this policy, the repo rate will reach 5.90 per cent. One basis point is equal to one hundredth of a percentage point.
The upcoming RBI MPC meeting is expected to provide significant cues to the financial ecosystem in India. In keeping with the 75 bps rate hike by the US Federal Reserve earlier this month, and rising inflation, which is expected to be around 7% for September, we are preparing for a rate hike by the MPC. The MPC will weigh on the dollar's strength and the geopolitical concerns in Europe while they make this decision, and it is likely that the market will have to contend with a 50 bps hike. Raghvendra Nath, Managing Director Ladderup Wealth Management said that India should be able to handle the hike, barring major disruptions over the short-term, and that we remain bullish on the economy as macro factors are aligned to propel it higher.
It will lead to a longer tenure or higher EMI for home loan borrowers if the repo rate increases to 5.90 per cent. The default option for banks is to increase the tenure of a loan in a way that the EMIs don't change, but the number of years for payment increases proportionately. An existing home loan borrower with an outstanding principal of Rs 50 lakh and a tenure of 20 years at 8.12 per cent interest will have the loan period extended by two years and 3 months at a new rate of 8.62 per cent.
Another option is to pay higher EMI while sticking to the ongoing repayment schedule. On a loan of Rs 50 lakh for a period of 20 years, you will have to pay a revised EMI of Rs 43,771 compared to the earlier EMI of Rs 42,196. The previous rate hikes of 1.4 per cent since May are a factor in the fact that the difference is much higher.
Your car loan will go up with the rise in repo rate. If you have a car loan of Rs 10 lakh for a period of 5 years, your EMI may go up to Rs 20,758 at 9 per cent from Rs 20,516 at the assumed rate of 8.5 per cent. Public sector banks PSBs usually offer personal loans at floating interest rates whereas private banks offer personal loans at fixed interest rates. If your personal loans are based on floating rates then it will go up in line with other EMIs.
It is advised to go with banks with a good CASA ratio, as such lenders tend to raise rates at a slower pace than banks with a low ratio. CASA is a ratio of deposits in the current account and savings account to the total deposits of the bank.