RBI Repo Rate: Loans To Get Costlier As RBI Hikes Key Lending Rate To 3-Year High

The Reserve Bank of India hiked its key lending rate by 0.5 per cent to a three-year high of 5.90 per cent, which will weigh heavily on the already stretched budgets of Indian households dealing with a rise in prices of almost every item.

The 50 basis points hike marks the fourth consecutive increase since May 2022. The rate hikes were made necessary by inflationary pressures, the situation in Ukraine, and microeconomic uncertainty in advanced economies from aggressive central bank policies globally.

That has had a contagion impact on the Indian economy and financial markets, forcing the RBI's hands to tighten policy more aggressively.

Indian banks are certain to pass on the latest RBI rate hike to customers immediately, as seen in recent months, making loans costlier and leading to higher equated monthly instalments (EMIs).

"The latest hike in repo rates will make funding costlier for existing and new borrowers. For existing borrowers, all home, car, personal, and education loans on floating rates will become more expensive," said Adhil Shetty, CEO of Bankbazaar.com.

"New borrowers will have to take loans at a higher price than last week," he added.

Financial experts suggest that to negate the recent and expected rise in borrowing rates, consumers could postpone a new loan and pre-pay existing loans to reduce the burden.

"At a time like this, it is advisable to pre-pay in any shape and form to control your interest outflow. You could cut down non-essential expenses to save money for pre-payments. With pre-payment, borrowers may feel the pinch in the short term, but they will be better off once the rate cycle reverses," said Mr Shetty.

The global economic outlook remains bleak, with several major countries battling recessionary trends, so consumers should calibrate their finances at this time to account for these challenges.

Consumers will be able to shorten their loan terms and EMIs if they pre-pay a part of their loans. as 

"If you took a home loan at 7 per cent for 20 years, your per lakh interest is ₹86,071. Your per lakh EMI is ₹775. If your rate goes to 8.9 per cent after three months, you had 237 EMIs left, but now it could theoretically go to 410 months assuming the same EMI. Assuming a bigger EMI, the tenor extension will be smaller. But at 410 months, your loan is 173 months or nearly 14.5 years longer," said Bankbazaar.com's CEO.

"At this stage, if you made an immediate pre-payment 17 times your EMI, your tenor reduces to 236 months. Four pre-payments of 4.5 times EMI once every 12 months has roughly the same effect in reducing your tenor," he added.

PTI reported quoting industry experts that the RBI's decision to raise the repo rate would negatively affect customers' buying intentions, but it will only have a minor effect on house sales in the affordable and middle-income ranges.

While industry experts claimed that a 50 basis point increase in repo rates would result in an increase in house loan interest rates and a decrease in the affordability of home ownership, Developers of real estate and advisors predict the impact will be minimal given the pent-up demand and present festive season.

Anarock Chairman Anuj Puri told PTI, "with this repo rate hike, home loans will get dearer soon. This could impact residential sales to some extent during the upcoming festive quarter, particularly in the affordable and mid-range housing segments."

Housing sales have risen by 40-50 per cent in the July-September quarter, despite a hike in interest rates on home loans and a rise in housing prices and Mr Puri expects the impact to be moderate if mortgage remains below 9 per cent.

Developers may further sweeten the deal to entice potential customers by providing discounts and freebies to increase sales during the festival season.

Amit Goyal, CEO, India Sotheby's International Realty, which is into brokerage of luxury homes, told PTI that the hike might impact consumption sentiments negatively ahead of the festive season.

"Home loan rates will still remain below 9 per cent per annum and people must utilize this opportunity and make their purchases by cashing in on offers and festive discounts in the market," he advised.

While Ramesh Nair, CEO of Colliers India told PTI that home buying sentiment is not likely to be impacted significantly, Shiwang Suraj, Founder & Director, Inframantra said, the rate hike will have only limited impact on housing sales due to festive demand and offers by developers.