Following rising interest rates in the United States, the Reserve Bank of India (RBI) is expected to raise the repo rate, the rate at which commercial banks borrow from RBI. Experts say the central bank could raise the repo rate by 0.50%, 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 borrowed at floating rates are likely to be impacted by rising repo rates. As a result, your auto, personal, and home loans can become more expensive because when the cost of borrowing increases for banks, it automatically causes banks to increase loan rates proportionately.
RBI has increased the repo rate three times since May. During this period, the key rate rose from 4% to 5.40%. If RBI increases rates by 50 basis points in this monetary policy, the repo rate will reach 5.90%. A basis point is equal to one hundredth of a percentage point.
“The upcoming RBI MPC meeting is expected to offer important clues to the financial ecosystem in India. In line with the 75 basis point rate hike by the US Federal Reserve earlier this month and rising inflation, which is also expected to be around 7% for September, we are bracing for a rate hike by the MPC. The continued strength of the dollar, as well as geopolitical concerns in Europe, will weigh on the MPC as it makes this decision, and it is likely that the market will face a 50 basis point rally. However, we remain bullish on the economy as macro factors are aligned to propel it higher and we believe India should be able to absorb the upside ahead barring any major disruptions in the short term,” he said. said Raghvendra Nath, Managing Director – Ladderup Wealth. Management.
If the repo rate increases to 5.90%, it will result in longer tenure or higher EMI for home borrowers. The default option for banks is to increase the term of a loan so that the EMIs remain unchanged, but the number of years in payment increases proportionally. For example, an existing home borrower, with an outstanding principal of Rs 50 lakh and a term of 20 years at 8.12% interest, will have the loan period extended by two years and 3 months at a new rate of 8, 62%. the burden of increased tenure, the borrower will also bear the burden of additional interest of Rs 11 lakh.
Another option is to pay a higher EMI while adhering to the current repayment schedule. For example, on a loan of Rs 50 lakh for a term of 20 years, you would have to pay a revised EMI of Rs 43,771 compared to the previous EMI of Rs 42,196. The difference is however much higher if one includes previous rate hikes of 1.4% since May.
Car and personal loan
With the rise in the repo rate, your car loan will also increase. For example, if you have a car loan of Rs 10 lakh for a period of 5 years, your EMI may increase from Rs 20,758 at 9% to Rs 20,516 (at the assumed rate of 8.5%). However, this varies in the case of personal loans, as public sector banks (PSBs) generally offer personal loans with variable interest rates, while most private banks offer personal loans with fixed interest rates. Therefore, if your personal loans are based on floating rates, they will also increase at the same rate as other EMIs.
Finally, it is advisable to choose banks with a good CASA ratio, as these lenders tend to increase their rates at a slower rate than banks with a low ratio. CASA is the ratio of deposits in checking account and savings account to total bank deposits.
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