- RBI raised the repo rate by 25 basis points to 5.50% due to inflation concerns
- Floating-rate home loans linked to repo rate may see higher EMIs after the hike
- Fixed-rate home loans remain unaffected as their interest rates are locked in
The RBI's 25-basis-point repo rate hike to 5.50% on Wednesday has sparked widespread speculation about its impact on retail loans. Following the three-day meeting that concluded on Oct. 7, RBI Governor Sanjay Malhotra announced the decision, noting that it was prompted due to inflation concerns. He attributed it to factors such as the Middle East crisis and broader economic situation in India and globally.
With inflation remaining above the RBI's 4% target and global risks pushing up crude oil prices, the central bank's decision to hike prices means borrowers are set to face higher costs. The ultimate impact will be cleared in a few days time as banks assess how much impact they wish to pass on to the consumer. But ultimately, this could mean that borrowers with existing retail loans such as home loans, linked to floating rate, will need to pay higher EMIs.
Fixed vs Floating Home Loan:
After the RBI's repo rate hike, floating-rate home loans may become costlier as banks could raise lending rates. This is because floating rate loans are linked to external benchmarks such as repo rate. Fixed-rate loans offer repayment by locking in interest rates. This means that borrowers with existing fixed rate loans are unlikely to see any impact on EMI.
ALSO READ: RBI Shifts Stance, Hikes Repo Rate For First Time Since February 2023 As Inflation Concerns Mount
Which Is More Attractive Now?
Indian lenders typically charge higher fixed interest rates on home loans. This is why borrowers usually go for floating rates. When there are expectations that the RBI might decrease the repo rate, it can benefit such borrowers. However, the current situation has prompted borrowers to re-consider which of the two could be more attractive.
Fixed home loan rates are typically 1% to 2.5% higher than floating interest rates. This is because lenders charge a premium to absorb the risk of future market rate hikes.
Example: If a lender offers an existing floating home loan rate at 8%; their fixed rate is likely to hover between 9-10.5%. With the RBI's decision to hike repo rate by 25 basis points, the lender would now offer the loan at 8.25%. This is still considerably lower than the fixed rate. This makes the floating rate attractive despite the hike.
Future Outlook
However, if the inflation concern continues and the broader economic situation doesn't resolve, it could prompt the RBI to make continuous rate hikes in the coming quarters. As a result, borrowers may need to remain prepared for potential readjustments to their EMI budgets.
Ultimately, the choice between these options depends on whether you want the certainty of fixed rates or are comfortable with the risk of floating rates. Before deciding, you should check with an expert and discuss aspects such as economic outlook and other data to assess where floating rates are likely to go in the coming future.
Many lenders also offer a hybrid loan product, where the interest rate remains fixed for a specific initial period before automatically converting to a floating-rate loan.
ALSO READ: 'Dovish Hat Is Now Completely Off': DBS' Radhika Rao Says RBI's Rate Hike Cycle Has Begun
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