Home loans and EMI car loans will become more expensive as RBI raises repo rates in surprise move

Reserve Bank of India (RBI) Governor Shaktikanta Das said on Wednesday that he held an off-cycle meeting amid high inflation and voted to raise the repo rate by 40 basis points, citing persistent inflationary pressures in the economy. Also, in line with the hosting withdrawal stance, it was decided to increase the cash reserve ratio by 50 basis points to 4.50%, Shaktikanta Das said. Rising CRR can suck cash up to Rs 83,711.55 crore, he said. The increase in the CRR will be effective from midnight on May 21.

In line with the announcement, the RBI increased the repo rate by 40 basis points to 4.40% from 4% earlier. The last time the repo rate was cut was in May 2020 and it has remained unchanged ever since. The hike will take effect immediately. In addition, the cash reserve ratio (CRR) was increased by 50 basis points, which will put additional upward pressure on interest rates.

What is the pension rate and why is it important

Whenever commercial banks run out of funds, they approach the RBI to borrow money. The RBI lends money to these banks at a particular rate known as the repo rate. The RBI periodically decides whether to increase/reduce the rate or leave it unchanged. The decision of the central bank’s monetary policy committee could have an impact on liquidity and inflation in the Indian economy.

The repo rate is a very important tool for the RBI to control inflation trends. Raising or lowering rates by the RBI will make borrowing more or less expensive for commercial banks. The repo rate and inflation have an inverse relationship. If the rate is increased, it will lower inflation and if the rate is lowered, inflation will increase.

What this means for home and car loan borrowers

RBI’s surprise decision to raise the repo rate will force your bank to raise interest rates on loans. So your home loans and car loans should become more expensive. If you are thinking of taking out a loan, you better do it quickly, as interest rates on loans may soon rise.

Atul Monga, Co-Founder and CEO of BASIC Home Loan, said, “The repo rate hike is a calculated measure that RBI has taken to combat inflation and the current impact on the economy. The increase in the repo rate means people might have to pay a slightly higher interest rate if they take out a home loan. However, this decision may not have a major impact on the mortgage market at this time, as there are many other factors such as demand and supply, and buyers, which play a major role. in driving rates. But, if the rise in the repo rate continues to remain high, it could have an effect.”

Rising repo rates mean bad news for existing borrowers as banks and NBCF will soon start raising interest rates on loans, meaning loan EMIs will also rise. All loans will be impacted by the latest policy decision, whether it is a home loan, car loan or personal loan.

Naveen Kukreja – CEO and Co-Founder, Paisabazaar.com, explained, “The MPC’s 40bp hike in the repo rate would increase the cost of credit for existing borrowers as well as new borrowers. The impact would be quickest on those considering taking home loans or any other loans linked to external benchmark rates, especially the repo rate. Interest rates for existing borrowers tied to the repo rate or any other benchmark interest rate, both internal and external, would remain the same until their next loan reset date. The new interest rate on their reset date will be calculated after taking into account the applicable reference rate on the reset date and credit spreads. This new interest rate will then remain in effect until their next loan reset dates, regardless of any changes to the repo rate by the RBI in the meantime. The rise in the repo rate would have no impact on fixed interest rate loans.”

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