What Does An RBI Rate Hike Mean For You?

Existing borrowers need to rethink their loan repayment strategy as they face higher EMI outgo

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The Reserve Bank of India (RBI) has increased the repo rate, which is the interest rate at which the central bank lends money to commercial banks. It impacts your finances in several ways. With a 35 basis points (bps) hike, the repo rate now is at 6.35 per cent, which is the highest since August 2018 and has been on the upswing since May this year. As deposit and loan interest rates offered by banks are linked to the repo rate, both loan and interest on deposits will be impacted. While depositors will cheer the move, those servicing loans will face higher EMI outgo.

Almost all loans that were disbursed since October 2019 are linked to the repo rate and the impact can be seen with lenders informing borrowers about the rise in EMIs. With a cumulative 225 bps increase in repo rate since the beginning of this financial year, the impact of the recent hike will pinch borrowers the most. Already EMIS have been on the rise, and any room to increase the home loan tenure to maintain the EMI appears to have been exhausted by those who wanted to maintain the EMI and raise the loan tenure, especially for home loans.

On their part, banks and other lenders are known to pass the EMI burden immediately to customers, but take time to increase the interest rates on deposits. One of the reasons for such a move is because of the impact that such a move has on their profits when shifting the increase in repo rate burden to consumers on their profits. The same, however, is not the case when it comes to increasing the rates on deposits. Moreover, unlike the increase in EMIs on home loans, which is immediate for existing borrowers, there is no such reprieve for deposit holders as existing deposits are locked in at interest rates prevailing at the time of making the deposit.