Do you have an EMI? RBI rate hike to make your borrowings more expensive

Repo rate hike will directly affect your EMIs as banks will soon increase their lending rates
Planning to take a loan? You should not wait any longer. EMIs (equated monthly installments) on home, personal, auto and other loans are set to get costlier as the Reserve Bank of India (RBI) increased the repo rate by 25 basis points to 6.5 per cent from the previous rate of 6.25 per cent. The RBI has also raised the reverse repo rate by 25 basis points to 6.25 per cent. The decision was taken during the RBI’s Monetary Policy Committee’s (MPC) bi-monthly meeting on Wednesday.

In its last monetary policy meeting on June 6, the RBI had already increased the repo rate by 25 bps (basis points). Headed by governor Urjit Patel, the central bank raised key policy rates to the highest in two years for the second time in a row in last two months to tackle inflationary pressures. Over the last two bi-monthly MPC review meetings; there has been a total of 50 bps increase in the repo rate. The second-consecutive increase in repo rate comes as a shocker for those who are already paying EMIS, taken loans from banks or are planning to borrow in future. 

You should be concerned about repo rate hike because it will directly affect your EMIs as banks will soon increase their lending rates. The repo rate has a direct impact on bank’s cost of borrowing from the central bank, that means the banks will raise their MCLR (Marginal Cost of Funds based Lending Rate) or charge more interest on loans. Hence, it makes costlier for lenders (banks) to borrow money. As the interest rate of loans is linked to the MCLR, repo rate surge causes a hike in interest or lending rates. Home loan borrowers will be affected to a great extent as housing loans are taken for a longer duration. In fact, since the beginning of this year, several banks have been increasing their MCLR rates, said a Livemint report.

New loan borrowers will have to bear the impact of increased interest rates on loans. RBI's second consecutive rate hike since October 2013, is likely to prompt action by banks or react to the policy decision, hence, EMIs will become expensive for potential loan seekers to borrow funds in future. If you cannot afford to pay higher EMIs, then you can prefer to borrow loan under the Pradhan Mantri Awas Yojana (PMAY) which is a credit-linked interest subsidy scheme offered on the basis of your income level.

However, existing home loan borrowers will not be immediately affected as they will continue to pay their existing interest rates until next reset date of their loan arrives. After the reset date, future EMIs will be calculated based on the MCLR effective on that date. If the MCLR-linked home loan rates increase, the existing borrowers should make sure to extensively compare the new rates with those ones offered by several banks and look for potential savings on transferring their loans before selecting a specific lender, reported the Economic Times.

What is repo rate?

Repo rate is the rate at which the central bank RBI lends money to the commercial banks in the case of shortage of funds.

What is EMI?

Equated Monthly Installment (EMI) is the fixed amount you to pay to the bank or lender every month on a fixed date.

What is MCLR

As an internal benchmark or reference rate for banks, the Marginal Cost of Funds-based Lending Rate (MCLR) is the minimum interest rate of a bank below which it cannot lend to the loan seekers. And, the reverse repo rate is the rate at which the central bank borrows money from the commercial banks.

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