NEW DELHI: Loans are all set to become more expensive with the Reserve Bank of India on Friday increasing the repo rate (at which it lends money to commercial banks) by 0.5% to 5.4% with immediate effect.
Home and car loans, which are linked to repo rates, will feel the pinch immediately as the transmission of RBI rate action is instant in such cases.
The interest rates are already around 7.55% for borrowers with high credit scores. With the latest hike, it could go past 8%.
That will be a substantial increase considering that in the beginning of the year, home loan rates were just 6.65%.
ICICI Bank and Punjab National Bank have already raised their lending rates after the central bank increased the benchmark interest rate on Friday.
Y Viswanatha Gowd, MD & CEO of LIC Housing Finance, said the repo rate hike will cause some fluctuation in the EMIs or the tenure on the home loans but the demand for housing is likely to remain robust. A back-of-the-envelope calculation shows the EMI on a Rs 50-lakh loan with 20-year tenure will increase by Rs 1,518.
On the positive side, those with fixed deposits in banks will gain as their rates will also go up, albeit slowly.
At present, fixed deposit rates of one-year tenure range from 5.6% to 6.3%. RBI has so far raised the repo rate by a total of 1.4% since May.
With the latest hike, it has reversed the Covid-era cuts completely. The present repo rate at 5.25% is higher than the pre-Covid level of 5.15%.
Justifying the hike, RBI governor Shaktikanta Das said the regulator was forced to act as inflation remained at “unacceptably high levels”. RBI retained its inflation outlook for the current fiscal at 6.7%, while the regulator is mandated to keep it under 6%.
Das said India’s economy is improving, thanks to a revival in urban demand. RBI has pegged FY23 GDP growth at 7.2%.
Banks can’t rely on RBI money forever: Das
RBI Governor Shaktikanta Das said on Friday that banks cannot “perennially” rely on the central bank’s money to support credit offtake and they need to mobilise more deposits to aid credit growth.