How RBI's repo rate hike could impact your home loan and EMIs

The rate hike of 25 bps today will make EMIs expensive by approximately 2-4 per cent.

New Delhi, Feb 08: The Reserve Bank of India (RBI) has increased the repo rate by 25 bps to 6.5 per cent, which will have an immediate effect on EMIs.

This is the sixth time interest rate has been hiked by the central bank since May last year, taking the total quantum of hike to 250 basis points.

Making the announcement, RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) by a majority decided to raise the policy repo rate by 25 basis points and keep a 'strong vigil' on inflation outlook.

"Policy rate at 6.5 per cent still trails the pre-pandemic level," Das said, adding that core inflation will remain sticky.

How RBI's repo rate hike could impact your home loan and EMIs

The repo rate is the rate at which Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds.

With the hike in repo rate, commercial banks may increase the higher cost of borrowing to their customers by raising interest rates on loans. This, in turn, results in an increase in the EMI on floating rate loans, such as home loans, personal loans, and auto loans.

The RBI's decision to hike the repo rate by 25 bps today will make EMIs expensive by approximately 2-4 per cent.

When monetary policy changes like this impact rates for home loans, you have two options either continue with the ongoing repayment schedule with a higher EMI or switch to a long tenure with the same EMI amount.

However, the rate at which the EMI will increase will depend on type of loan and the terms of the loan agreement.

Some loans may have a cap on the maximum increase in interest rate, while others may be linked to a benchmark rate that may not change as quickly as the repo rate.

It's important for borrowers to keep an eye on changes in the repo rate and interest rates, as even small increases in the EMI can add up to substantial amounts over the life of a loan.

In such a scenario, the default option for borrowers is to review their loan agreements and consider their financial situation before making any decisions about their loans in response to changes in interest rates.