RBI Increases Repo Rate: Impact on Loan Costs as Rates Rise After 44 Months
MUMBAI: The Reserve Bank of India (RBI) has raised key interest rates, a move that is likely to increase the cost of mortgages and other loans while also enhancing returns on deposits. On Wednesday, the RBI announced a 25 basis point hike in the repo rate, bringing it to 5.5%. This marks the first increase since February 2023, driven by stronger-than-expected economic growth and rising price pressures linked to the ongoing conflict in West Asia.
The increase will raise the equated monthly installment (EMI) on a ₹1 crore loan over 15 years by approximately ₹1,500 per month, based on a base rate of 8.5%. If borrowers choose to keep their EMIs unchanged, the higher rate could extend the loan term by about 5.5 to 5.9 months, effectively adding six additional installments. RBI Governor Sanjay Malhotra indicated that the shift to a “calibrated tightening” stance suggests that future policy actions will likely involve either further rate hikes or pauses, depending on evolving economic conditions.
RBI raises FY27 growth and inflation projections
The RBI’s decision also reflects an upward revision in growth and inflation projections. SBI Chairman CS Setty stated that the repo rate hike addresses inflation concerns while acknowledging the resilience of the Indian economy. He noted that geopolitical developments and supply-side pressures, particularly elevated energy prices, require ongoing scrutiny.
SBI Group Chief Economist Soumya Kanti Ghosh projected that inflation could peak at around 6.8% in November 2026, with a corresponding peak repo rate of approximately 6% anticipated by December. The RBI has adjusted its forecast for crude oil prices, now estimating an average of $95 per barrel for FY27, up from $90, following a rise in global prices. In response to the rate hike, Bajaj Finance has already revised its fixed deposit rates by up to 40 basis points, offering rates for senior citizens as high as 8.15%.
The RBI has also raised its 2026-27 real GDP growth forecast by 40 basis points to 7.1%, primarily due to a significant upward revision in Q2 growth from 6.4% to 7.2%. The inflation forecast for this year has been increased from 5% to 5.2%, with all quarterly projections adjusted higher, particularly for Q1 FY28, which saw the largest increase of 30 basis points to 5.6%. Core inflation expectations have also been slightly raised to 4.4%. The Monetary Policy Committee anticipates that inflation will average 5.8% over the next three quarters.
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