Loan EMIs to go up after RBI hikes rates by 50 basis points to 5.4%

NEW DELHI: Loan EMIs are set to rise, with the Reserve Bank of India on Friday hiking key repo rate by 50basis points (bps) to 5.4 per cent in a bid to tame inflation in the country and support growth.
This the third straight hike by the central bank in four months and is expected to raise borrowing costs for corporates and individuals. The marginal spending facility rate and the bank rate has been revised to 5.65 per cent.
Amid the rising inflationary pressure in India, the RBI increased its policy repo rate by 40% basis points in May followed by another hike of 50 basis points in June. The policy repo rate currently stands at 5.4%.
The RBI is mandated to ensure that CPI-based inflation remains at 4 per cent with a margin of 2 per cent on either side.
All six members of the Monetary Policy Committee (MPC), headed by RBI governor Shaktikanta Das, unanimously voted for the latest rate hike. “”MPC decided to focus on withdrawal of accommodation to keep inflation within target while supporting growth,” said Das.
The global geopolitical situation and the elevated commodity prices indicate that inflation will likely remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23. Twice in the past, the repo rates have been hiked. The third hike implies costly home and personal loans. Parents servicing education loans for their children will also feel the pinch of higher interest rates. Also, your car and two-wheeler loans are going to become expensive in the future.
The RBI’s action automatically pushes up the cost of mortgages as over 90% of bank home loans are linked to the repo rate. While deposit rates will also rise, the increase is expected to be slower as the banking system is still flush with the pandemic stimulus. The bad news for borrowers is that this is not the last of RBI’s rate increases. Crisil expects RBI to hike rates by another 25 basis points this fiscal year – a view echoed by most economists. This would mean that by the end of March, interest rates will be half a percentage point above the pre-pandemic level. RBI had slashed the repo rate in March, 2020 to cushion the impact of Covid-induced lockdown, and maintained status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.
“The best way forward for borrowers would be to either go for a higher EMI or make regular prepayments. There are several options to choose from, from as little as one extra EMI per year to as much as 5% of outstanding principal every year to reduce the burden of higher interest rates. Choose the alternative that works best for you, taking into account your financial situation and liabilities,” said Adhil Shetty, CEO,
In June policy, RBI decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth. During June 2022 policy, RBI projected inflation at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, with risks evenly balanced.
India’s consumer price index (CPI) inflation stood at 7.01% in June 2022 which slightly moderated from 7.01% in May. This year, in April, Inflation peaked at 7.79%.
Point to note: inflation has stayed above RBI’s upper limit of 6% for the sixth consecutive month.