Home Loan May Get Costlier As RBI Hikes Repo Rate Again
The Reserve Bank of India (RBI) in its bi-monthly monetary policy review on Wednesday, hiked the repo rate again by 25 basis points (bps) to 6.50 percent. The RBI’s Monetary Policy Committee (MPC) hiked the repo rate for the second-consecutive time in the last two policy review meetings.
In the last policy review meeting held in June, the MPC had increased repo rate by 25 basis point to 6.25 percent after a gap of four-and-a-half years. There has been a total of 50 bps hike in the repo rate over the last two MPC meetings. With the latest hike, the repo rate now stands at 6.50 percent. Therefore, with deposits rates going up and liquidity remaining tight and with the repo rate hike, we could see further rate hikes in home loan.
The decision of six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel maintained a neutral stance, which will give the central bank flexibility to move either way.
Repo rate is basically the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds. A high repo rate means that banks borrow funds from the RBI at a higher rate, increasing their cost of funds. When the RBI increases the repo rate, banks usually pass on the burden to the customers. (One basis point is equivalent to one-hundredth of a percentage).
Highlights Of RBI’ Monetary Policy Review
- The RBI also raised retail inflation projection for the second half of the year to 4.8 percent from the 4.7 percent it had projected in June due to hike in minimum support price. The projected inflation rate is above its targeted comfort level of 4 percent.
- The RBI retained the GDP forecast for the current fiscal at 7.4 percent.
- The RBI also highlighted its concerns over crude oil prices which continued to remain volatile despite a slight moderation. The current rate hike comes on the back of continued hardening of inflation, a sharp hike in Kharif MSP and rupee depreciation against the US dollar.
The central government has decided to fix the minimum support prices (MSPs) at 150 percent of the cost of production for all Kharif crops for the sowing season of 2018-19. This increase in MSPs for Kharif crops is much larger than seen in the past few years and will have a direct impact on food inflation. However, RBI remains confident of strong economic activity supported by the monsoon. Moreover, the central government has reduced Goods and Services Tax (GST) rates on several goods and services.
Increase In Interest Rates On Home Loans
A hike in repo rate may affect home loan borrowers as banks are likely to increase interest rates in tandem. This also means that banks’ marginal coast based lending rate (MCLR) in all likelihood will go up. This is likely to increase the home loan interest rates and thus leading to an increase in borrowers equated monthly installments (EMIs).
In June, many leading banks including SBI had increased their MCLR. Major banks including State bank of India (SBI), ICICI Bank and PNB had raised their MCLR in early June, just before the RBI’s monetary policy review. Some other banks raised their rates after the monetary policy.
Impact On Your EMIs
Both public and private sector banks may soon pass on the repo rate hike to consumers by increasing their marginal cost-based lending rate (MCLR). Loans will get marginally costlier. Your home loan EMIs may go up depending on the quantum of loan. For instance, on a loan of Rs 10 lakh for 20 years at an interest rate of 8.50 percent, the EMI is Rs 8680. But, if your bank hikes its interest rate by 25 bps to 8.75 percent then your EMI will increase by Rs 160 and go up to Rs 8840. For entire tenure, the impact would be bigger as the borrower would need to pay more as the interest of the loan.
It’s Impact On New Borrowers
Fresh home loans will become marginally costlier following the rate hike as banks will pass on the burden to the borrowers. Post this rate hike, if you plan on taking a loan, you should not wait any longer. New home loan borrowers should extensively compare home loan rates offered by various lenders before selecting a particular one.
Existing Borrowers’ Home Loan Linked To MCLR
According to the central bank’s mandate, all loans including home loans disbursed on or after April 01, 2016 should be linked to MCLR. Banks decide whether to charge additional mark-up over and above MCLR or not. However, the lending rate cannot be below the MCLR.
If your existing home loan is an MCLR-linked one, the EMI burden may or may not increase immediately depending upon your next reset date. The next loan rates will be calculated based on the MCLR effective on the next reset dates. However, as and when the banks increase their MCLR, the existing home loan borrowers will continue to repay their loans in the existing rates.
Existing Borrowers’ Home Loans Linked To Base Rate
If your home loan is linked to the base rate regime, your interest rate may go up if you have taken it from State Bank Of India (SBI). SBI has hiked base rate by 25 basis points effective from July 1, 2018. Therefore, post this hike, its base rate stands at 8.95 percent. Thus, you should consider switching to an MCLR based loan as MCLR is a superior rate setting mechanism than base rate system due to the more transparency in rate setting and better transmission of policy rates.
There is a possibility that banks will continue to hike interest rates as commercial banks take a cue from RBI’s monetary policy stance. For instance, every time the RBI lowers or increases repo rate, banks are typically passing on the benefit or burden respectively to retail customers. From a real estate perspective, the rate hike will slightly impact buyer sentiment and this could marginally affect the housing sales post the RBI hikes repo rate.
Home Loan May Get Costlier As RBI Hikes Repo Rate Again
Ajay Verma, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.