Repo rate unchanged: How it impacts your home loan EMI?
The Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.5% for the 10th consecutive time. The decision has positive implications for borrowers with home loans linked to the repo rate, as their equated monthly installments (EMIs) will not be affected, giving them some financial stability. The RBI's move aims to balance inflation control and economic growth promotion.
Repo rate's impact on home loans
Since October 2019, banks have been following an external benchmark system, mostly linking floating-rate retail loans to the repo rate. Consequently, any change in the repo rate directly and immediately impacts the interest rates of these loans, including home loans. When the repo rate is cut, borrowers benefit from lower interest rates. Meanwhile, an increase in the repo rate means a higher interest burden for them.
RBI's stance on inflation and economic growth
The consumer price index (CPI) inflation has stayed below the medium-term target of 4% for the second month in a row, inching up to 3.65% in August from 3.6% a month ago. In light of these trends, the MPC has changed its stance from "withdrawal of accommodation" to "neutral." This marks a major departure from the approach it had been following since May 2022.
Anticipated rate cut in December
Kanika Singh, Chief Risk Officer at the Indian Mortgage Guarantee Corporation (IMGC), expects a rate cut in December owing to an improving inflation outlook in India and a global monetary easing cycle. She said, "A minimum 25 basis points [bps] rate cut is expected." This prediction is in line with recent moves by central banks across the world, including the US Federal Reserve and the European Central Bank (ECB), which have also eased their interest rates.
Impact of repo rate changes on home loan borrowers
For instance, a borrower who availed a ₹50 lakh home loan two years ago at an 8.65% interest rate for a 20-year tenure would have initially paid ₹55.28 lakh in total interest. However, the 60 bps repo rate hike between October 2022 and February 2023 increased the effective interest rate to 9.25%, raising the total interest payable to ₹69.7 lakh and extending the loan tenure by an additional two years and eight months.
Repo rate cut could offset previous rate hikes
Adhil Shetty, Chief Executive Officer (CEO), BankBazaar.com explained that a 25 bps rate cut in three tranches (i.e., 75 bps in total), starting from December, would reduce the effective interest rate to 8.5%. This would bring the total interest payable back to ₹55.9 lakh and restore the original loan tenure of 240 months. This shows how a 75 bps cut over six months could largely offset the impact of previous rate hikes.
Banks' response to repo rate and liquidity constraints
Despite the unchanged repo rate, HDFC Bank has already raised home loan rates for new borrowers by 40 bps this year. In January, the lowest interest rate on a ₹50 lakh home loan at HDFC Bank was 8.35%, but it has now increased to 8.75%. According to data compiled by Paisabazaar, State Bank of India (SBI) and Bank of India (BoI) have also increased their effective new home loan rates by 10 bps due to liquidity constraints affecting not just HDFC Bank but other banks as well.