Loan EMIs Set To Go Up After RBI Hikes Interest Rates By 50 Basis Points

Your home loan equated monthly installments (EMIs) are set to go up after the Reserve Bank of India increased its key lending rate - repo rate by 50 basis points to a three-year high of 5.9 per cent on Friday. 

The rate hike by the central bank came to tame the inflation which has been trending above its tolerance level of 6 per cent for the eighth month in a row.

The rate hike will immediately affect those who have taken loans on a floating rate basis and are tied to an external benchmark, those pegged to other benchmarks would follow soon after. 

The new borrowers will need to pay higher EMIs for their loans after banks start passing on the latest policy rate hike.

Under RBI regulations, banks are supposed to reset the interest rate on loans linked to external benchmarks at least once every three months.

With RBI’s key rate hitting the highest level in three years, the cost of funds is set to go up for banks which will lead to a jump in the interest rate on various loans provided by banks.

The central bank's monetary policy committee (MPC) had hiked the key policy rate by 140 bps since May to 5.4 per cent to cool off domestic retail inflation that has stayed above the RBI's upper tolerance limit since January.

Shishir Baijal, Chairman & Managing Director, Knight Frank India, said: “Tight liquidity conditions along with the repo rate hike would lead to a significant rise in the cost of funding, impacting home loan rates as well. Going by the current trends we expect about 50% of this will be passed onto the home loan borrowers. A rise in home loan rates will further impact affordability across the markets. As per Knight Frank affordability index will deteriorate by another 2%  This might slowdown home buying decision for a short to medium term.”

“The rate hike may impact the real estate sentiment where buyers are likely to invest in their dream homes during the ongoing festive season. Home loan interest rates may increase now, leading to short-term turbulence on overall housing demand,” says Ramani Sastri, Chairman & MD, Sterling Developers.

“The recent consecutive repo rate hikes had already added to buyers’ overall acquisition cost. With gradually increasing loan rates, homebuyers’ apprehension could set in quickly and they might adopt the wait-and-watch sentiment”, he added.

Home is one of the biggest asset of people and looking at the overall economic condition of most of the people over the country who have been bathed by inflation, the customers intend to wait for tenure extension when it comes for home loans.