The Reserve Bank of India has raised the repo rate by 50 basis points to 4.9 per cent at the Monetary Policy Committee (MBC) meeting in June. Earlier in May, the central bank raised the repo rate by 40 basis points in a surprise move to curb inflation. The recent rise in repo rates will affect current and new retail borrowers.
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The repo rate is the rate at which commercial banks borrow from the Reserve Bank of India. If the central bank raises the repo rate, banks’ borrowing costs for retail and other loans will also rise. Interest rates on fixed-rate loans, such as personal loans, remain the same throughout tenure. However, some retail loans, including home loans and auto loans, are linked to rates set by the Reserve Bank of India. Most banks and non-bank financial institutions (NPFCs) combine their lending rates with the repo rate set by the central bank. Therefore, when the repo rate increases, the repo rate of banks (RLLR) increases.
A two-fold increase in the repo rate will have an immediate impact on borrowers. Banks are required to reset interest rates at least every three months. For existing home loan buyers, the equivalent monthly installment or EMI will increase. You get Rs. If you have a home loan of Rs 30 lakh, your EMI is Rs 23,349. If the interest rate rises by 50 basis points or 0.5 per cent, your EMI will rise to Rs.24,260.
For a home loan of Rs 50 lakh, which is outstanding at 7.05 per cent for 20 years, the EMI will increase from Rs 38,915 to Rs 40,433. As the Reserve Bank raises the repo rate, banks will increase lending time by keeping the EMIs stable for existing borrowers. This will affect the interest on the loan.
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