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Home loan burden to soar as RBI expected to raise repo rate yet again

Your home loan burden is all set to soar as RBI may increase repo rate again in the upcoming RBI Monetary Policy Committee meeting.

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The resolution is expected by June 8 and it would be a no-brainer that the benchmark lending rates will be hiked again.

RBI Repo Rate Hike: Floating home loan interest rates of a bank have to be mandatorily linked to an external benchmark, which for most banks is the RBI repo rate. So, every time the RBI repo rate is revised, there is a direct impact on a borrower’s EMI or tenure. As the transmission of the repo rate is immediate, the borrower sees the impact on home loan interest rate within three months. When the repo rate goes up, the repo rate linked lending rate (RLLR) also goes up, thus leading to an increase in the home loan interest rate for the borrower. However, instead of increasing the EMI, in most cases the tenure of the loan is increased by banks.

The previous RBI rate hike was 0.4 per cent, while another 0.6 per cent hike will take the repo rate hike to 1 per cent or 100 basis points. The entire 100 basis point increase will reflect an increased home loan interest rate.

Assuming a loan outstanding of Rs 35 lakh, a 1 per cent increase in interest rate pushes the interest burden by almost 8 per cent (approximately Rs 3.6 lakh), keeping all other factors constant.

At 7.1 per cent ( on a Rs 35 lakh)

EMI – Rs 31,655
Interest paid – Rs 21,97,898

If rate increases by 100 basis points or 1 per cent then at 8.1 per cent (on a Rs 35 lakh)

EMI – Rs 33,650
Interest paid – Rs 25,57,000

The Reserve Bank of India (RBI) in its first meeting of the Monetary Policy Committee (MPC) for the financial year 2022-23 held in April 2022 had kept the policy rates unchanged. But, then came the off-the block surprise rate hike of 0.4 per cent. Going forward, the RBI is expected to further increase repo rate thus impacting the borrowing costs.

Here’s what the experts are expecting from RBI during the June 6-8, 2022 policy meet.

V Swaminathan, Executive Chairman, Andromeda and Apnapaisa

The RBI’s Monetary Policy Committee headed by the Governor started its bi-monthly review this morning and will be observing the effect of factors like high-inflation concerns and the evolving geo-political situations resulting in over-pricing of various commodities.

The resolution is expected by 8th of June and it would be a no-brainer that the benchmark lending rates will be hiked again.

Rate Hike Expectation: It is being anticipated that by the end of the current financial year, the RBI can hike the Repo rate up to 5.60% which is currently at 4.40%.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management

The off-cycle rate hike has stoked expectations of front loading of rate hike decisions by RBI. With the US not yet relenting on moderating pace and quantum of rate hikes, and inflation not showing immediate signs of abating, it seems yet another slam dunk decision to hike rates in the upcoming policy.

Rate Hike Expectation: Quantum of rate hike (40-50 bps in our view) will be a key determinant in extrapolating the terminal repo rate for FY 2023.

Churchil Bhatt, Executive Vice President & Debt Investments, Kotak Mahindra Life Insurance

We may have seen the peak of inflation for now but we may not have seen the end of it yet. And failure to bring down inflation even after the central bank reaches the neutral rate has the possibility of destabilizing the economy. Hence, failure to contain the inflation genie should scare the markets more than the policy maker’s fight against it.

Rate Hike Expectation: We expect the MPC to deliver a no-brainer policy rate hike of 25-40 (basis points) bps in June.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank

The MPC has signalled a gradual withdrawal of accommodation in light of higher inflation. It is likely that the RBI’s stance will be “Neutral” while it will stay committed to bringing back inflation closer to the targeted levels through all possible instruments.

Rate Hike Expectation: I expect a rate hike between 35-50 basis points in the June policy. Based on inflation data and external factors, including oil and commodity prices, expect a total of 100 to 150 bps increase in repo rate from the current 4.40%.

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank

We expect the MPC to revise upward the inflation trajectory by 70-80 bps accounting for the upside price pressures. The GDP estimates may remain unchanged for now. From the policy withdrawal perspective, RBI in the last two months has moved quite aggressively and swiftly. The weighted average overnight rates have risen by 80-90bps since the April MPC policy.

Rate Hike Expectation: We expect a repo rate hike of 35-40 bps and status quo on CRR in the upcoming June policy.

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