The Reserve Bank of India's Monetary Policy Committee raised the repo rate by 25 basis points from 5.25% to 5.5% on Wednesday. The decision came after the MPC reviewed inflation, economic growth and other financial conditions.
The latest hike marks the first repo rate increase since February 2023, when the RBI also raised it by 25 bps. The central bank had subsequently kept the rate unchanged through 2023-24 before beginning its rate-cut cycle in 2025.
The move could have a mixed impact on borrowers and depositors. While existing fixed deposits generally remain unaffected by a repo rate hike, borrowers with floating-rate home loans linked to external benchmarks could see their borrowing costs increase if lenders pass on the full hike.
Impact on Rs 50-Lakh Home Loan
Consider a Rs 50 lakh floating-rate home loan at an initial interest rate of 7.5%. If the lender passes on the entire 25-bps repo rate increase, the interest rate could rise to 7.75%.
For a 25-year loan, the EMI at 7.5% is around Rs 36,950. At 7.75%, the EMI would rise to approximately Rs 37,766, an increase of around Rs 817 per month, assuming the tenure remains unchanged.
Over the full 25-year tenure, this could result in a significantly higher interest outgo of approximately Rs 2.45 lakh.
The EMI, for a 20-year loan, could rise by roughly Rs 780-800 per month if the entire rate increase is passed on.
For a 30-year loan, the monthly EMI could increase by roughly Rs 850-870. If the borrower continues with the same tenure, the overall additional interest outgo could cross Rs 3 lakh.
Repo-linked floating-rate loans generally reset after a change in the external benchmark, although the timing and mechanism can vary between lenders.
Borrowers can limit the impact by increasing their EMI slightly or making partial prepayments. Before making a decision, borrowers should also check with their lender whether a rate revision will increase the EMI, extend the tenure or affect both.
Impact on a Rs 50 Lakh Fixed Deposit (FD)
The impact is different for fixed deposit investors.
If you already have an FD, a repo rate hike generally does not change the interest rate applicable to that deposit. The rate is usually fixed for the agreed tenure when the FD is booked, unless it is a variable-rate deposit. This means an existing Rs 50 lakh FD would generally continue to earn the rate agreed upon at the time of booking.
On the other hand, investors opening a new FD or renewing a matured deposit could benefit if banks respond to the RBI's move by increasing their deposit rates.
Here's the calculation:
For instance, if a bank passes on the full 25-bps increase to new FD rates, the additional annual interest would be around Rs 2,500 on every Rs 10 lakh invested, before tax.
On a Rs 50 lakh fresh FD, a 25-bps increase would therefore translate into approximately Rs 12,500 more in annual interest, before taxes, compared with the earlier rate.
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Home Loan Borrowers Vs FD Investors
In simple terms, the 25-bps repo rate hike could mean higher borrowing costs for floating-rate home loan customers, while new FD investors may get an opportunity to lock in higher rates if banks increase deposit rates.
Existing FD holders, meanwhile, generally do not see an immediate change in the interest rate on their deposits.
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