How loan EMIs, bank FDs could be impacted by RBI’s interest rate hike

The Reserve Bank of India (RBI) today raised repo rate by 50 bps to 5.40 per cent, thus reaching to pre-Covid levels. Aiming to contain inflation by squeezing the liquidity in the market, RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) hiked the policy repo rate for the third time in a row on Friday. 

According to investment experts, this decision of the Indian central bank would help contain the inflation under control and new bank depositors are expected to get higher return on their money. However, they said that RBI rate hike may become a costly affair for new loan borrowers and existing Repo Rate-linked long-term retail loans.

Speaking on how one’s retail loan’s EMIs and bank fixed deposits (FDs) will be impacted from this RBI’s decision for interest rate hike, SEBI registered tax and investment expert Jitendra Solanki said, “After RBI raising key interest rates, banks are expected to raise interest rates on retail loans like personal loan, home loan, auto loan, etc. So, one’s EMI on home loan, car loan, bike loan, etc. are expected to go northward after this RBI’s rake hike in third successive MPC meeting. However, at the same time, banks are expected to raise interest rates on bank deposits like bank FD and other terms deposits. So, the decision is a bad news for borrowers and good news for depositors.” The SEBI registered expert said that the move is aimed to containing inflation and hence banks are expected shortly to raise interest rate on both retail loans and bank deposit to squeeze money from the market..

Expecting thhe raise in interest rate on long-term retail loans to impact some existing borrowers as well, Manikaran Singhal, Founder at Goodmoneying.com said, “Interest rate hike on long-term retail loans will impact some existing borrowers’ monthly EMI as well as these days banks are giving Repo Rate linked retail loans and in that case banks restructure the long-term loan, especially home loan and auto loans. So, in case a bank decides to raise interest rate on long term retail loans then in that case monthlyn EMI of the home loan, auto loan and other long term loan borrowers is expected to shoot up if their loan is Repo Rate linked.”

On how RBI’s move will impact home loans, Anuj Puri, Chairman at ANAROCK Group said, “A rate hike was expected, but the expectation was for a maximum of 35 bps. The hike by 50 bps is definitely on the higher side, and home loan lending rates will now edge further into the red zone.” He said taht repo rate now stands at 5.4%, thus reaching the pre-pandemic levels. While inflation has partially eased as compared to the surge in April, it continues to be above the RBI’s target.

“This is the third consecutive rate hike in the last two months and finally marks the end of the all-time best low-interest rates regime – one of the major factors that drove housing sales across the country since the pandemic. This whammy comes along with the inflationary trends of primary raw materials, including cement, steel, labour, etc., that have recently led to a rise in property prices. Together, these factors – rising home loan rates and construction costs – will impact residential sales that did reasonably well in the first half of 2022,” said Anuj Puri of ANAROCK.

On how one’s home loan EMI will change if banks decides to raise home loan interest rates by 50 bps, Manikaran Singhal of Goodmoneying.com said, “Keeping current home loan interest rate is around 6 per cent. If a borrower is granted home loan of 35 lakh for a period of 20 years, then its monthly EMI at 6 per cent stands at around 25,000 whereas if the home loan interest rate is raised by 50 bps in future, then the monthly home loan EMI would come around 26,000. So, this 50 bps home loan interst rate hike will cost around 1,000 per month.” He said that the EMI rise will impact existing borrowers too if their home loan interest rate is flexible with RBI’s Repo Rate.

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