Repo rate hiked by RBI; Home loan EMIs might rise

Repo rate hiked by RBI; Home loan EMIs might rise

Repo rate hiked by RBI; Home loan EMIs might rise

Your home loan could get costlier as the Reserve Bank of India [“RBI”] surprisingly raised interest rates on Tuesday in an attempt to dampen inflation. RBI says that it is now better prepared to deal with the risk of major capital outflows roiling emerging economies. The RBI announced a 0.25% point hike in the repo rate — the rate at which banks borrow from the central bank— to 8%. This is a move that could force banks to raise lending rates (which is already beyond reach), which will mean higher EMIs and squeezed up budget of home buyers. It might also push up the cost of borrowing for the corporate.

While increasing the repo rate the RBI however, shared some positive insight and said that if the retail inflation eases as projected, it does not foresee further near-term monetary policy tightening. The rupee sank 11% last year and the 25-basis-point rate hike was driven by expectations of high but moderating Consumer Price Index [“CPI”] inflation, an indication the central bank intends to adopt a recent proposal to base its rate decisions on a CPI target.

Talking about one of the major impacts of hiking the key policy rate, experts are of the view that it will hit property sales, particularly in the residential segment. The real estate builders, developers and firms are expressing their disappointment at the move and are also hoping that this would be the last round of monetary tightening by the central bank. The developers fear that the property market is already facing the lull and this move will further discourage the home buyers as an increased EMI would be a burden on common man.

RBI Governor Raghuram Rajan faces the daunting challenge of reviving an economy growing at its slowest in a decade while battling stubbornly rising prices, especially for food, fuelled by supply-side shortages beyond the control of monetary policy. He said, “We have injected some medicine, 75 bps in rate hikes since September, and we have to watch to see how that medicine works along with, again, the weak state of the economy as well as the stabilisation of the rupee.”

As of yet, the banks have not announced an interest rate hike as the action will be declared and taken after analysing the cost of funds over the next few days. In the meantime, you can calculate the amount by which your EMIs might increase in case there is an interest hike here.

Some industry experts are of the view that increasing the key rate to tame inflation is the right decision by RBI; however, it will not ease out things permanently and end the tightening cycle; if there is a need to knock out the core inflation, the policy rate will likely have to be hiked further.

Last Updated: Wed Jan 29 2014

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