The Reserve Bank of India (RBI) has increased the policy repo rate by 0.5 per cent or 50 basis points in the June MPC meeting. The policy rate as on June 2022 stands at 4.90 per cent.
Earlier, in the first meeting of the Monetary Policy Committee (MPC) for the financial year 2022-23 held in April 2022 had maintained status quo with policy repo rate at 4 per cent. Later, RBI’s surprise repo rate hike came in May 2022 when the policy rate was increased from 4 per cent to 4.4 per cent after announcing a 0.4 per cent increase.
The cost of funds for banks goes up when the repo rate is increased. This is because the repo rate is the rate at which banks borrow funds from the RBI. As a result, the cost of borrowing for retail and other borrowers goes up after the repo rate is hiked by the RBI.
“Lending rates have already moved up as most loans today are linked to benchmarks like Repo rate or MCLR. We should expect the RBI to continue with the rate hikes in the remaining MPC meetings in 2022. We expect the RBI to hike the repo rate to near 6% by early 2023,” says Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC.
Since the previous increase in May, many banks have already increased their lending rates, both for new and existing borrowers. Several NBFCs and Housing finance companies have also announced an increase in their lending rates.
The immediate impact of the RBI repo rate hike is on the retail loans such as home loans which are linked to the bank’s external benchmark. Most banks have linked their lending rates to the RBI repo rate and, therefore, the impact is immediate for the borrowers.
When the repo rate goes up, the repo rate linked lending rate (RLLR) of banks also goes up. This means an increase in the home loan interest rate for the borrower. In practice, instead of increasing the EMI, in most cases the tenure of the loan is increased by banks.
In contrast, the MCLR loan borrowers may not feel the pinch of a repo rate hike immediately. Even though RBI repo rate hike pushes the cost of funds for banks higher, they can revise the EMI or Tenure only when the re-set date arrives. The re-set date in MCLR linked loans is generally 12-months while for few banks it is even at 6-months intervals.
Overall, in a flexible home loan, the rate of interest will keep going up and down. The only way to decrease the home loan EMI or interest burden is to keep replaying the outstanding loan amount as and when you have surplus funds. The sooner you repay the loan, the lower will be the cost of owning your home.