How RBI interest rate hike could affect loan EMIs, bank FDs

According to investment experts, this decision by the Indian central bank will help keep inflation under check and new bank depositors are expected to get higher returns on their money. However, he added that the RBI rate hike could become a costly affair for new loan borrowers and long-term retail loans linked to the existing repo rate.

Speaking on how RBI’s decision to hike interest rates will affect one’s retail loan EMIs and bank fixed deposits (FDs), Jitendra Solanki, SEBI registered tax and investment expert said, “The key interest rates hike by the RBI. After, banks are expected to increase interest rates on retail loans like personal loans, home loans, auto loans etc. Hence, one’s EMI on home loans, car loans, bike loans etc. is expected to move northwards, according to this RBI. However, at the same time, banks are expected to raise interest rates on bank deposits like bank FDs and other term deposits. Hence, the decision is a bad news for borrowers and for depositors. Good news for you.” The SEBI registered expert said the move is aimed at controlling inflation and hence banks are expected to soon increase the interest rate on both retail loans and bank deposits to squeeze money out of the market.

Expecting the increase in interest rate on long-term retail loans to impact some existing borrowers as well, Manikaran Singhal, Founder, GoodMoneying.com said, “The hike in interest rate on long-term retail loans is expected to impact the monthly EMIs of some existing borrowers. As these days banks are giving repo rate linked retail loans and in that case banks restructure long term loans, especially home loans and auto loans. So, if a bank offers interest on long term retail loans Home loan, auto loan and other long term loan borrowers are expected to increase their monthly EMIs if their loan is linked to the repo rate.

On how RBI’s move will impact home loans, ANAROCK Group Chairman Anuj Puri said, “The rate hike was expected, but the expectation was a maximum of 35 bps. A hike of 50 bps is definitely on the higher side, And home loan lending rates will now move into the red zone.” He added that the repo rate is now 5.4%, thus reaching pre-pandemic levels. While inflation has moderated partly compared to growth in April, it remains above the RBI target.

“This is the third consecutive increase in the past two months and finally marks the end of the all-time best low-interest rates regime – one of the key factors driving housing sales across the country since the pandemic. Comes with inflationary trends of primary raw materials including cement, steel, labor, etc., which have recently driven up property prices. Together, these factors – rising home loan rates and construction costs – affect residential sales. Which will do reasonably well in the first half of 2022,” said ANAROCK’s Anuj Puri.

On how the home loan EMIs will change if banks decide to hike home loan interest rates by 50 bps, Manikaran Singhal of goodmoneying.com said, “The current home loan interest rate will change. The rate is around 6% if a borrower is given a home loan. 35 lakhs for a tenure of 20 years, so its monthly EMI of 6 percent is approx. 25,000 whereas if the home loan interest rate is increased by 50 bps in future, the monthly home loan EMI will come to approx. 26,000. So, this 50 bps home loan interest rate hike will cost approx. 1,000 per month.” He added that the EMI hike will also affect existing borrowers if their home loan interest rate is flexible with the RBI’s repo rate.

first article