Home, car and personal loans: Your EMIs are likely to go up after Friday

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Following the rise in interest rates in the US, the Reserve Bank of India (RBI) is expected to increase the repo rate, the rate at which commercial banks borrow from RBI. Experts say that the central bank may hike the repo rate by 0.50 per cent, or 50 basis points. The next meeting of the Monetary Policy Committee (MPC) is scheduled to start tomorrow with the policy announcement to be made on Friday, September 30, 2022. 

Those who have taken out loans at floating interest rates are likely to be impacted by the rise in repo rates. Therefore, your car, personal and home loans may become costlier, as when the cost of borrowing increases for banks it automatically leads to a proportionate rise in lending rates by banks. 

RBI has increased the repo rate three times since May. During this period the key policy rate has risen from 4 per cent to 5.40 per cent. If RBI increases rates by 50 bps in this monetary policy, then the repo rate will reach 5.90 per cent. One basis point is equal to one hundredth of a percentage point. 

“The upcoming RBI MPC meet is expected to offer significant cues to the financial ecosystem in India. In keeping with the 75-bps rate hike by the US Federal Reserve earlier this month, and the rising inflation, which is expected to be around 7% for September as well, we are preparing for a rate hike by the MPC. The dollar’s continued strength, as well as the geopolitical concerns in Europe, will weigh on the MPC while they make this decision, and it is likely that the market will have to contend with a 50-bps hike. However, we remain bullish on the economy as macro factors are aligned to propel it higher and believe that India should be able to absorb the upcoming hike, barring any major disruptions over the short-term,” says Raghvendra Nath, Managing Director – Ladderup Wealth Management. 

Home loan

If the repo rate increases to 5.90 per cent, it will lead to a longer tenure or higher EMI for home loan borrowers. The default option for banks is to increase the tenure of a loan in a way that the EMIs remain unchanged, but the number of years for payment increases proportionately. For example, an existing home loan borrower, with an outstanding principal of Rs 50 lakh and tenure of 20 years at 8.12 per cent interest will have the loan period further extended by two years and 3 months at a new rate of 8.62 per cent  Not just the burden of increased tenure, the borrower will also bear the brunt of extra interest outgo of Rs 11 lakh. 

Another option is to pay a higher EMI while sticking to the ongoing repayment schedule. For instance, on a loan of Rs 50 lakh for a tenure of 20 years, you will have to pay a revised EMI of Rs 43,771 compared to the earlier EMI of Rs 42,196. The difference is, however, much higher if we include the previous rate hikes of 1.4 per cent since May. 

Car and Personal Loan

With the rise in repo rate your car loan will also go up. For example, if you have a car loan of Rs 10 lakh for the period of 5 years then your EMI may hike to Rs 20,758 at 9 per cent from Rs 20,516 (at the assumed rate of 8.5 per cent).   However, it varies in the case of personal loans as public sector banks (PSBs) usually offer personal loans at floating interest rates whereas most private banks offer personal loans at fixed interest rates. Hence, if your personal loans are based on floating rates then it will also go up in tune with other EMIs.

Last but not least it is advised that one should go with banks with a good CASA ratio as such lenders tend to raise their rates at a slower pace compared to banks with a low ratio. CASA is the ratio of deposits in the current account and savings account to the total deposits of the bank.

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