RBI rate hike: Home loan and auto loan EMIs set to get costlier

New Delhi: Now a borrower will have to fork out more as EMIs for home, car and other loans are likely to rise after the Reserve Bank of India (RBI) hiked its key interest rate by 40 basis points (bps) to 4.40% from 4% earlier. On Wednesday, the RBI, in an unscheduled policy review meeting, suddenly raised the repo rate, citing lingering inflationary pressures in the economy.

During his speech, Governor Shaktikanta Das said that the global economic recovery was losing momentum and in addition, lingering inflationary pressures were also becoming acute. As a result, Das said, the central bank would withdraw a dovish stance held over the past two years.

He said the MPC decided to increase the cash reserve ratio (CRR) by 50 basis points to 4.50%. The CRR hike can suck cash up to Rs 83,711 crore, Das said, while adding that the CRR hike will be effective from midnight on May 21.

The last time the repo rate was cut was in May 2020 and it has remained unchanged ever since. Das said the hike would take effect immediately.

What is the pension rate?

Commercial banks borrow money from the RBI when they run out of funds. The RBI lends money to these banks at a particular rate known as the repo rate. The RBI periodically decides whether to raise or lower the rate or leave it unchanged. The MPC’s decision could impact liquidity and inflation in the economy.

Importance of pension rate

The repo rate is an important tool for the RBI to monitor inflation trends. RBI can raise or lower rates and make borrowing more or less expensive for commercial banks. There is an inverse relationship between the repo rate and inflation. If the RBI raises the rate, it will bring inflation down, and if it lowers the rate, inflation will rise.

What is the reverse repo rate?

The rate of interest that the RBI pays to commercial banks when they store excess cash reserves with the central bank is called the reverse repo rate. The RBI used this method to control the cash flow in the economy. This allows the central bank to “mop up” excess liquidity by making it more profitable for commercial banks to store liquidity reserves with the central bank.

What impact does this have on borrowers?

The decision to increase the repo rate will force banks to raise interest rates on loans. As a result, home loans and car loans will become more expensive. If an individual is planning to take out a loan, he should do so quickly as the interest rate on the loans will start to rise.

The rise in the repo rate is bad news for existing borrowers as well as banks. This move will soon begin to raise interest rates on loans, which will eventually make EMIs more expensive. As a result, all loans will be impacted, whether it is a home loan, a car loan or a personal loan.

During an interview with ABP LIVE, some big bosses and executives in the real estate sector expressed their reaction to the recent rise in rates which will have an impact on the sector.

Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory

The RBI’s decision announced at today’s off-cycle meeting was aimed at re-anchoring inflation expectations and will eventually result in a stronger growth outlook. The decision also ends the historically low interest rate regime on home loans, which has boosted housing demand and helped the economy return to pre-COVID levels. So far, the RBI’s approach to dealing with the situation created by the pandemic and the measures taken to help revive the economy will go down in history as extremely pragmatic. These measures have enabled a vigorous recovery in the real estate sector. The latest RBI decision as well as the rising cost of construction inputs could temporarily limit the growth momentum of the sector.

Pritam Chivukula, Co-Founder & Director, Tridhaatu Realty & Treasurer, CREDAI MCHI

After two years of the repo rate unchanged at 4%, RBI’s decision to raise the interest rate by 40 basis points to 4.40% suddenly surprised the real estate sector at an off-cycle monetary policy meeting which s is held today. Consistent with the housing pullback stance, the sharp acceleration in rates will affect homebuyers with EMI concerns on home loans. The state government, which is the biggest beneficiary of housing demand, is expected to come forward to support home buyers by reducing the stamp duty rate to 3%.

Shraddha Kedia-Agarwal, Director, Transcon Developers

The RBI’s decision to raise key rates was anticipated due to very high inflation. We have already started to see a vertical movement in house prices and the decision will further hurt homebuyer sentiment which will impact overall demand.

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