In order to moderate inflation in the country, the Reserve Bank of India’s (RBI) MPC on Wednesday increased the key repo rate by 35 basis points, or 0.35 percentage points, to 6.25 per cent, with immediate effect. The key policy rate hike will impact borrowers and make home, vehicle and personal loans and their EMIs costlier. This is because banks are now expected to raise their external benchmark linked lending rate (EBLR) and marginal cost of funds-based lending rates (MCLR).
About 43.6 per cent of the total loans are now linked to the repo rate, while MCLR accounts for 49.2 per cent of the banks’ loans portfolio. There are two systems of loan interest rates — fixed and floating. Fixed interest rate remains the same throughout the loan tenure, while the floating interest rate keeps changing based on the repo rate movement. So, those who have taken loans on floating interest rates might see their interest rates rise in near future.
How Much Are EMIs Expected To Increase?
The increase in EMI amount will depend upon the quantum of loan, its tenure and interest rate. So, the change in EMI amount would be different for different borrowers. Here’s a calculation that estimates a possible rise in EMIs:
Take a look at how the rate hike will impact a borrower who has taken a loan of Rs 30 lakh for a 20-year period at an interest rate of 8.50 per cent. Currently, the borrower will be paying Rs 26,035 as EMI. “But, if we factor in the 0.35 per cent increase due to repo hike, the new interest rate would jump to 8.85 per cent, making the EMI amount Rs 26,703,” V Swaminathan, executive chairman of Andromeda Loans, said.
He added that this implies the borrower incurs an additional Rs 668 monthly for the same home loan repayment. And, he/ she would have to shell out Rs 1.60 lakh over the entire duration of the loan amount.
Atul Monga, CEO and co-founder of BASIC Home Loan, said, “As interest rates rise, the impact of monthly instalments for both new and existing customers will be felt. For instance, if the rate of interest is hiked by 0.35 per cent, the EMI of a loan of Rs 10 lakh taken at 8.5 per cent for 10 years will increase by around Rs 300.”
He added that to deal with the impact of a higher interest rate, it is important to maintain good credit, research the best rate offers, and consider refinancing existing loans to lower the monthly payments customers can also opt for long tenures or switch to a floating rate of interest.
In the consecutive fifth hike this year, the RBI’s Monetary Policy Committee on Wednesday raised the repo rate by 35 basis points (bps) to 6.25 per cent with immediate effect, making loans expensive. The policy rate is now at the highest level since August 2018. The RBI has maintained policy stance at ‘withdrawal of accommodation’.
The RBI has retained its inflation forecast for the current financial year 2022-23 at 6.7 per cent. The RBI expects to bring CPI inflation down to 5 per cent and 5.4 per cent in Q1FY24 and Q2FY24, respectively.
The central bank has lowered FY23 GDP growth forecast to 6.8 per cent from 7 per cent earlier.
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