In May 2022, soon after geopolitical concerns took centrestage and the Covid threat started abating, the Reserve Bank of India (RBI) increased repo rates for the first time after 31 months to control inflation. Ever since, RBI has been on a rate hike spree, pausing only recently in April 2023, with an indication that this may not be the end of the rate hike cycle yet.
In the last one year, the central bank has raised interest rates by 2.5 per cent or 250 basis points (bps), and repo rates have reached the 6.50 per cent level after four and a half years. The 2.5 per cent number may not look alarming, but it has left a trail of misery for borrowers who have seen equated monthly instalments (EMIS) go up by a huge 20 per cent for a home loan amount of ₹50 lakh over a period of 20 years, at the cost of compromising with other expenses or remaining indebted for a longer period.
The recent policy action by RBI has kindled some hope. The pause in rate hikes in the first bimonthly policy announcement for financial year 2023-24 has given rise to the cautious expectation that EMIs may not go up further, stopping short of being optimistic about a rate cut.
The development throws up key issues for borrowers, both new and existing. The first, of course, is where are the interest rates headed. The second is relevant for new borrowers who may have been waiting for a rate hike pause and would now be wondering if the time is right for them to take the plunge. The third involves existing investors, who need to put a strategy in place if they haven't done so already, especially now that they may not have to realign their cash flows every two months with every RBI monetary policy announcement. Before dealing with those, we take stock of the pain the rate hikes have caused over the past year.
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