RBI Raises Repo Rate After 3.5 Years: Implications for EMIs and Loan Interest Payments Explained
The Reserve Bank of India (RBI) has raised the repo rate by 25 basis points to combat rising inflation, which has been exacerbated by global events such as the US-Iran conflict. This increase will likely lead to higher equated monthly installments (EMIs) for borrowers, adding financial pressure on households already grappling with the rising costs of essential goods. The RBI’s decision aims to keep inflation under 6%, as indicated in its latest monetary policy review.
Impact on Loan EMIs and Tenor
With the repo rate hike, banks will face higher borrowing costs, which they will pass on to customers through increased interest rates. Borrowers with floating-rate loans will see their EMIs rise, depending on the reset date of their loans. Santosh Agarwal, CEO of Paisabazaar, emphasizes that those with floating-rate home loans should check their loan agreements to understand when the new rates will take effect.
For instance, a borrower with a Rs 40 lakh loan could see their total interest outgo increase from Rs 4,867,894 to Rs 5,063,945, an increase of Rs 1.9 lakh due to the rate hike. Similarly, loans of Rs 50 lakh and Rs 60 lakh could see increases of Rs 2.45 lakh and Rs 2.94 lakh, respectively. Borrowers have two options to manage the increased costs: either accept a higher EMI while keeping the loan tenor the same or extend the tenor while maintaining the current EMI.
Fixed Deposits and Savings
On the flip side, the repo rate hike can benefit savers looking to invest in fixed deposits (FDs). As banks adjust to higher borrowing costs, they are likely to offer more attractive interest rates on FDs to attract deposits. However, Adhil Shetty, CEO of Bankbazaar, notes that the benefits for FD investors may not be immediate. Existing fixed deposits will continue to earn interest at the rates they were booked, while new deposits will receive the updated rates.
Shetty advises existing FD holders to compare rates across banks before reinvesting, especially if their deposits are maturing soon. He also suggests that savers consider laddering their FDs to maintain liquidity while taking advantage of higher rates as they become available.
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