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Published on: Jun 10, 2018 @ 14:24
The Reserve Bank of India (RBI) on Wednesday hiked the key repo rate for the first time in over four years by 25 basis points (bps) to 6.25 percent. In its bi-monthly monetary policy review, the Monetary Policy Committee (MPC) agreed to raise the repo rate.
All the six members of the MPC voted unanimously citing concerns of inflationary pressures from high crude oil prices, rising inflation, and a depreciating rupee. In fact, the repo rate is the rate at which the central bank lends money to other banks. This hike will have a direct impact on borrowers as banks may start increasing their lending rates on loans. This move of the RBI may translate into higher EMIs for your home loans.
This is the first instance since January 28, 2014, when repo rates were hiked by 25 bps to 8 percent. In fact, RBI continued to cut the repo rate thereafter and subsequently, rates started going down from 2015. In its last policy revision, on August 2, 2017, RBI had reduced repo rate by 25 basis points to 6 percent.
Why RBI hike the rate now?
The MPC, headed by RBI Governor Urjit Patel, increased the repo rate by 25 bps to 6.25 percent but kept its policy stance as “neutral”. A majority of analysts were expecting the central bank to maintain status quo in rates and the RBI’s move has caught many of them by surprise.
In their second bi-monthly monetary policy review, the RBI has further retained its GDP growth projection at 7.4 percent for the financial year 2018-19. In fact, the RBI’s main objective behind this policy change is to keep Consumer Price Index (CPI) inflation under check which has been going up over the past few months. As per the latest report, annual consumer inflation was 4.58 percent in April 2018. The steep rise in global crude oil prices and a weakening rupee have added to the inflationary pressure.
How does it impact the home borrowers?
Generally, it has been seen in the past that banks have been very proactive in passing on rate hikes to borrowers, but the policy transmission was not encouraging when rates went down. In fact, the policy transmission has already been followed by some banks in terms of marginal hike in their lending rates (MCLR) over the past week. State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, HDFC and ICICI Bank have already raised their lending rates (MCLR) by up to 0.10 percent across various loan tenures on June 1 in anticipation of a rate hike. Kotak Mahindra Bank and IDBI Bank had also announced the hike in their lending rate.
So, all those big banks that revised rates last week may not raise rates immediately, while others are likely to hike their lending rates. The immediate fallout of this rate change would be that the cost of borrowing could slightly go up. However, banks will also hike deposit rates and it will be good for savers.
Mostly all the home loans are on floating rates these days, so, a little bit of change in loan rates does not affect the performance of residential real estate sector much. Moreover, home loan borrowers have a one-year reset clause. So, if their rates get revised, then there is a status quo for a year. Therefore, existing borrower may not be immediately burdened with any hike in their EMI amount.
However, the increase in policy rate may further dampen the sentiments of the revival of the country’s housing market a bit, which after suffering a prolonged period of the slump has just begun to show some signs of improvement. Moreover, an existing borrower may not witness any change in EMI amount with the banks increasing their MCLR after the RBI rate hike. There could be a change in the tenure of the loan, which would result in raising the total cost of your home loan, as a longer tenure means you pay more EMIs. A higher interest rate would eventually increase the long-term interest out-go. Although this move of RBI may impact some home buyers to be a little bit tentative in their decision making for quite some time, overall there will be little or no impact in the housing sector.
Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.
