The Monetary Policy Committee (MPC) of the Reserve Bank of India on Wednesday hiked the key policy rate, the Repo rate or the rate at which the RBI lends funds to banks, by 25 basis points to 6.50 percent in a bid to lower in retail inflation. The RBI decision is expected to make all external benchmark linked (based on the Repo rate) loans costlier immediately.
” The RBI has also projected a GDP growth for the next fiscal at 6.4 percent. Retail inflation is expected to be 5.3 percent in FY24 ” the MPC said.
Since May last year, the RBI has increased the short-term lending rate by 225 basis points to contain inflation, mostly driven by external factors, especially global supply chain disruption following the Russia-Ukraine war outbreak.
At present, the repo rate is at 6.25%. For FY22-23, RBI’s first rate hike was 40 bps in May, followed by three consecutive rate hikes to the tune of 50 bps each between June to October, and then some softening to 35 bps in December policy.
Repo Rate Hike Impact On Fixed Deposits
When RBI increases Repo Rate, Fixed Deposits interest rate also increases. Changes in repo rates impact buyer and lenders of the country. FD investors who are planning to invest into FD this is right time to park your surplus funds into FD and earn high interest rates.
Due to covid pandemic RBI lower Repo Rates for high economy growth but also FD have low interest rates but now situation was good so RBI decided hiking repo rates by 25bps.
Impacts on Loan Takers
If you have borrowed a Home loan of Rs 25 lakh at 8.25 per cent per annum for a tenure of 20 years and the interest is hiked to 8.50 per cent, your EMI will go up approximately by Rs 394 from Rs 21,302 to Rs 21,696.
For Rs 50 lakh, the EMI will increase by Rs 788 from Rs 42,603 to Rs 43,391 in current financial year.
Home Loan EMIs
Similarly, for a person who borrowed a personal loan of Rs 5 lakh at 13% per annum for a tenure of 5 years, the EMI, in case the interest rate is increased to 15%, would go up by Rs 518 from Rs 11,377 to Rs 11,895.
In the last one year, interest rates on loans have gone up by around 2 per cent — undoing the EMI calculations for borrowers. Home and auto loan borrowers can keep their EMI unchanged even after the hike in interest rate.
However, they will land up paying EMIs for a longer tenure. Here, it is to be noted that when you extend your loan tenure, your interest payable amount increases across the years. Other factors like borrower’s age and ability to repay loans play a crucial role in tenure extension.
Likewise, if the interest rate is increased from 9% to 10% on an auto loan of Rs 7.50 lakh with a tenure of 7 years, the EMI will become costlier by Rs 400.
What is Repo Rate ?
The mechanism of operation in the case of repo rate for commercial banks gets funds from RBI utilizing government bonds as collateral.
In reverse repo rate, the commercial banks deposit their excess funds with the Reserve Bank of India and get interested from the deposit.