Contrary to expectations that the Reserve Bank of India will again hike the repo rate in its October policy meet, the apex bank in a surprise move kept its key policy rate unchanged at 6.50% in its monetary policy review on Friday. However, despite this, all types of loans – including home, car and personal loans – are set to cost more as a majority of banks and housing finance companies – including HDFC and SBI – have already increased their deposit rates apart from going in for a hike in their lending rates, anticipating a further hike in the policy rate. Even if the lending rates are not hiked immediately by other banks, they are sure to further go up sooner or later, going by the past experience.
Whatever be the case, while some industry experts hailed the RBI move, some experts termed it ‘risky’. For instance, Abheek Barua, Chief Economist, HDFC Bank, said, “This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence, currency and asset markets could see sharper corrections. A narrow focus on inflation targets was perhaps not desirable in the middle of a financial crisis. Change in stance suggests that the rate hike could still come in the coming months.”
It may be noted that a majority of market analysts and industry experts were earlier of the view that the apex bank may go for a hike in its key policy rates in the October policy review. For instance, Gaurav Gupta, Co-founder and CEO, MyLoanCare.in, expected the RBI to hike the repo rate by 25 bps in view of the prevailing macro-economic factors such as rising oil prices, signals of hardening rates in the US and a weakening rupee, which together have led to an inflationary impact on the economy.
Bhupinder Singh, Founder and CEO, InCred, also said that the RBI will most likely go ahead with a rate hike of 25 bps, with currency stability being the overriding priority. “While inflation is low at present, we should keep in mind that crude prices have gone up by more than 10% from the last policy, and the rupee has depreciated significantly. Both of these factors will impact the future inflation outlook, suggesting a rate hike. With regard to market liquidity, the RBI has already announced a sizable quantum of open market operations to pump up system liquidity. In that context we believe that hiking rates will be a judicious move,” he said.
Edelweiss Securities too was expecting the RBI to raise the policy rate in its monetary policy review on October 5. “Given the softness in inflation in recent months, one could argue for a pause. However, we expect the MPC to prioritize external stability and thus hike the policy rate by 25 bps,” it said.
Some financial experts were of the view that any hike in the repo rate, whenever that happens, should not result in any significant increase in the interest rates for retail borrowers as the same has already been factored in by banks and HFCs in their recent rate revisions.
“Over the past month or so, leading banks like HDFC, SBI, ICICI Bank have increased their MCLR rates by 5-20 basis points across products, including home loan, personal loan and car loan. Further, with the festive season around the corner and in view of intense competition for retail borrowers, banks will be forced to exercise restraint in passing on the policy rate hike impacts fully to end customers,” says Gupta.
Other experts, however, felt that while lenders have thus far largely been absorbing the impact of rate rises, any incremental hike is likely to lead to an increase in lending rates across all segments. “The impact on relatively-low interest rate products such as home loans and car loans is likely to be proportionately higher,” informs Singh.
Rajesh Cheruvu, Chief Investment Officer, WGC Wealth, says, “Although the RBI has kept policy rates unchanged, the ongoing healthy growth of credit and slower deposit growth combined with the potential spurt in currency demand during the festive season and state elections could compel banks to hike deposit rates in the months to come, which could push up the lending rates.”
Whatever be the case, here’s a look at how any increase in the housing loan rates will impact your EMIs:
Suppose, Delhi-based Rajan Verma is looking for a home loan of Rs 70 lakh for buying a flat of Rs 90 lakh. If Verma takes a home loan of Rs 70 lakh at the current rate of 8.75% for 20 years, this would imply an EMI of Rs 61,859. Over 20 years, Verma would be paying Rs 78,46,339 as interest. A 25 bps increase in the interest rate would increase the EMI to Rs 62,980 and the total interest paid to Rs 81,15,396. A 50 bps rate hike, on the other hand, would increase the EMI to Rs 64,110 and the total interest payable to Rs 83,86,562. That’s Rs 2,69,057 more in case of a 25 bps rate increase and Rs 5,40,223 more in case of a 50 bps rate hike.
Impact of Home Loan Rate Hike on EMI & Total Interest Payable:
|Current rate||New rate||Current EMI||New EMI||Difference (EMI)||Current interest||New interest||Difference (Interest)|
In case the home loan rates are increased further, then the existing home loan borrowers, who are now earning higher compared to what they were at the time of taking the loan, should ideally opt for higher EMIs to save their total interest outgo or contemplate pre-paying part of their loan to keep their EMIs constant. Opting for a longer tenure should be considered only if the borrower is unable to service higher EMIs at his current monthly income.
Also, “existing borrowers with housing loans at higher rates from HFCs or smaller banks should now consider transferring their loans to large banks with relatively lower interest rates. New home loan takers can consider taking a fixed rate loan especially as we enter a rising interest rate scenario or opt for a home loan overdraft facility to minimize their interest expenses. However, while opting for a fixed rate loan, they should be mindful of interest rate differential vis-à-vis floating rate loans as well as prepayment charges on fixed rate loans,” advises Gupta.