Home Loans Costlier After RBI's Second Back-To-Back Rate Hike In 5 Years

The Reserve Bank of India (RBI) on Wednesday announced a second straight 25 basis points hike in repo rate to 6.5 per cent. This the first time since October 2013 that the central bank has hiked borrowing costs at two consecutive policy meetings. Five of the six members on the rate panel voted for a rate increase. The RBI cited rising crude oil prices, volatility in global financial markets, and uncertainty around the full impact of MSP (minimum support price) on inflation among the key factors for its rate-hike decision in its third bi-monthly monetary policy review.

"The main reason for changing the policy rate is to ensure that, on a durable basis, we come to and maintain the 4 per cent (inflation) target. We have been away from the 4 per cent number for several months now," said RBI Governor Urjit Patel in a press conference after the announcement of RBI Policy.

However, the monetary policy committee maintained its stance at neutral.

The reverse repo rate or the rate at which RBI borrows from commercial banks stands adjusted to 6.25 per cent.

In June, the repo rate, or the benchmark lending rate, was raised for the first time in over four years, by 25 basis points to 6.25 per cent.

Borrowers can expect further rise in loan costs after the latest RBI policy. "Loans will get marginally costlier. On a loan of Rs. 1 lakh for 20 years at an interest rate of 8.5 per cent, the EMI is Rs. 868. If the rate rises to 8.75 per cent, the EMI increases to 884. If the interest rate reaches 9 per cent, the EMI becomes Rs. 900. In a rising rate scenario, it makes immense sense for customers repaying loans to make periodic principal pre-payments," said Adhil Shetty, CEO, BankBazaar.com.

Experts were surprised with RBI's neutral stance. "The hike was expected, but what is surprising is the stance has remained 'neutral'. We were expecting that since this is the second consecutive hike in two policies, the stance would be changed to 'tightening'," said Anagha Deodhar, Economist, ICICI Securities.

RBI projected inflation at 4.6 per cent in second quarter of fiscal 2019, 4.8 per cent in second half of 2018-19 and 5 per cent in first quarter of 2019-20. In June, RBI had projected consumer inflation at 4.8-4.9 per cent in the first half and 4.7 per cent in the second half of 2018-19.

Annual consumer inflation hit 5 per cent in June, the eighth straight month it topped the RBI's medium-term 4 percent target.

The RBI panel retained GDP growth projection for 2018-19 at 7.4 per cent, ranging between 7.5-7.6 per cent in for April-September and 7.3-7.4 per cent in second half of fiscal 2019.

HRA revision by the state government is another item on the RBI's radar.

Thirty-seven of 63 economists in a Reuters poll last week said the RBI will raise rates, while 22 said the next hike would come later this year, or early in 2019. (With Reuters inputs)