RBI set to raise policy repo rate tomorrow; your home loan EMIs may increase

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The Reserve Bank of India (RBI) is expected to raise the key rate by 25 to 50 basis points on Friday, the third hike since April – the start of the current fiscal year. This decision aims to control inflationary pressure.



The second bi-monthly meeting of the RBI’s monetary policy committee started on Wednesday. RBI Governor Shaktikanta Das is expected to announce the decisions of the monetary policy committee on Friday morning.

Srikanth Subramanian, CEO-designate, Kotak Cherry, said the central bank should raise the policy rate by 35 to 50 basis points.

“The RBI’s policy ahead is expected to echo the rate hike moves taken by peer central bankers, with the consensus between a 35-50 basis point hike recognized across the yield curve,” said Subramanian, quoted by the ANI news agency.

“Monetary policies are influenced by macroeconomic data where inflation and growth are tracked with few high-frequency indicators. Few advanced economies have fallen prey to conflicting indicators and face the difficult task of Domestically, the cooling of commodities with crude, good TPS numbers, rising PMI, firm energy consumption indicate resilience in the economy and have provided RBI with a clear direction to move forward. focus on price stability (inflation),” Subramanian added.



HDFC Bank Chief Economist Abheek Barua said the RBI is “likely to lift rates above a level deemed ‘neutral’ (which we believe is closer to 5.25% ) before slowing down or considering becoming more data dependent in this rate hike cycle.”

“We expect RBI MPC to raise the benchmark repo rate by 50 basis points as the CPI continues to reign above the RBI threshold band,” said Lakshmi Iyer, Chief Investment Officer (Debt) and Head of of products, Kotak Mahindra Asset Management Company.

Data analytics firm CareEdge expects RBI to raise the key interest rate by another 100 basis points over the remainder of the 2022-23 financial year. This will bring the terminal rate to 5.90% by the end of FY23.

While current CPI inflation is still around 7%, falling prices for many commodities are seen as a major influencing factor towards a lower inflation path by Q4 of exercise 23.



In its second bi-weekly monetary policy review in June, the RBI raised the repo rate by 50 basis points to 4.90%.

Home Loan EMIs Expected to Rise

If the RBI chooses to raise the key rate on Friday, it will be the third hike in a row. If the repo rate increases, it will lead to an increase in EMI for home loan borrowers. When the RBI increases the repo rate, the default option for banks is to increase the tenor of a loan such that the EMIs remain unchanged, but the number of years in payment increases proportionally.

If you have a current home loan 20 lakh for a term of 30 years at a current interest rate of 7.1% SBI, your EMI will increase from 13,441 to 14,675, a jump of 1234, if the interest rate on the SBI home loan drops from 7.1% to 8%.



How to reduce the EMI of higher loans?

Existing borrowers can use the balance transfer option to reduce their EMIs. This is a service that allows customers to transfer their entire outstanding loan balance to another bank that offers them lower interest rates on the outstanding loan amount. When the outstanding loan amount is higher, this is the best alternative, but processing fees and other related costs must be taken into account. The other option is full or partial prepayment, which helps existing borrowers reduce their loan burden. This option helps those who have enough excess funds to get out of debt faster and has no negative impact on their credit score.

New borrowers can choose a loan with a higher down payment to reduce their EMI charge, or a loan with a longer repayment term to reduce the amount owed in monthly installments. Customers who have a strong relationship with their bank can also take out loans with their existing banks, where interest rates can be negotiated. Alternatively, new borrowers can simply research banks or NBFCs that would offer them lower rates on their preferred type of loan.



(With contributions from ANI and Live Mint)

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