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What is the repo rate? How will RBI's policy rate hike impact EMIs?

2023-12-02 22:48:52source:xsn

The Reserve Bank of India has increased the repo rate for the fourth time in a row. The rate has been increased by 50 basis points to 5.90 percent. With this, the repo rate has increased by 190 basis points over the last few months -- from 4 percent in April to 5.90 percent in September. Five out of the six members of the monetary policy committee were in the favour of increasing the repo rate. RBI Governor Shaktikanta Das said even though the global economy is in turmoil, the Indian economy continues to be resilient. He, however, implied that retail inflation is expected to remain uncomfortably high at over 6 percent. "The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments...today, inflation is hovering around 7 percent and we expect it to remain elevated at around 6% in the second half of this year," he added. 

What is the repo rate? How will RBI's policy rate hike impact EMIs?

What is the repo rate?

What is the repo rate? How will RBI's policy rate hike impact EMIs?

The rate at which the RBI lends money to commercial banks is called the repo rate. It is an indicator to the banks if they must reduce or increase their lending rates. It is one of the many tools at RBI's disposal to bring inflation under control. If the rate is increased, banks will pay more as an interest to take the money from RBI. This means the banks will provide loans to the masses at a higher rate, thus lowering the demand and liquidity in the market. 

What is the repo rate? How will RBI's policy rate hike impact EMIs?

The reverse repo rate is the rate at which commercial banks park their funds with the RBI. It is used to control cash flows in the market. It is also increased to encourage banks to park more and more funds with the Central bank, thus leaving less money for borrowing. 

An increase in the repo rate means more expensive home loans and EMIs. Major lenders like HDFC, SBI and Punjab National Bank have been increasing the EMIs of homeowners.  Almost all floating EMIs, including home loans, will increase. 

Several banks have increased their repo rates to the tune of 0.75 percent.

How will RBI impact home loan EMIs?

If you have taken a home loan of Rs 30 lakh for 20 years, your interest rates would increase from 7.55 percent to 8.05 percent. In this case, your EMI will increase from Rs 24,200 to Rs 25,100, which is a hefty increase of Rs 900. This is a hike of around Rs 30 per lakh.

Similarly, if you have taken a loan of Rs 40 lakh for 20 years, your EMI will likely increase by Rs 1,200. For those whose home loan amount is Rs 50 lakh, their EMI will increase by Rs 1,500.