With RBI hitting a pause, what happens to your EMIs?

Home loan interest rates can be expected to remain stable

For the second time in a row, the Reserve Bank of India (RBI) decided not to change its policy repo rate at the quarterly meeting of the monetary policy committee (MPC).

The respite has come after a cumulative hike of 2.50 percentage points by the central bank in the last one year. This had led to a welcome jump in bank fixed deposit rates but also an unwelcome increase in home and personal loan rates.

So, with the repo rate remaining unchanged at 6.5 percent, what does it mean for the borrowers?

Impact of rate hike pause on your loans

The good news is that for now, loan rates can be expected to remain stable. No doubt, these are already at elevated levels. Many borrowers saw their floating rate home loans go up from 6.5 percent to 9.5 percent in just a year. Such a sharp uptick led to a significant increase in loan EMIs or equated monthly instalments as well as an increase in the interest burden and tenures.

Those who could afford to do so opted to increase their EMIs to offset the rate hike. But those who couldn’t had no option but to agree to increase the repayment periods. In fact, there are stories being shared on social media where loan tenure for many increased from 20 years to 30-plus years due to increase in loan rates (with constant EMI). In several cases, this means the repayment period extends into the retirement years.

Had there been a rate hike in say, the April-June RBI MPC meets, it would have pushed home loan rates even further and close to 10 percent for many.

In sum, this decision to not raise the policy rate will bring some much-needed relief to borrowers by not pushing up their EMIs or interest for now.

Also read | Bajaj Housing Finance extends home loan tenor to 40 years: Should you opt for a home loan with longer tenor?

Link between repo rate and loan EMIs

The repo rate is not the only factor on which your loan rates are based. But it is still an important factor. The RBI uses the repo rate as a tool to control inflation.

But when it comes to the borrowers, a majority of the home loans nowadays have floating rates linked to but not limited to external benchmarks like the repo rate. Hence, any increase in the repo rate (as had been happening in the last one year) leads to an automatic increase in the loan rates as well as monthly EMIs.

While the ongoing rate hike cycle has brought (financial) agony for borrowers, let’s not forget that when the RBI starts reducing the repo rate in the near future (as always happens once the rates have peaked and inflation is reined in), loan rates will again start falling and it will benefit borrowers who opted for the floating rate option.

Clearly, the pain of an increased interest burden isn’t permanent. It is costing you money due to higher interest but rates will come down eventually.

Related Reading – Is it time to prepay your home loan?

Will repo rates and loan rates fall soon?

That’s the million-dollar question, isn’t it?

While the RBI’s decision to keep the repo rate unchanged comes as a welcome respite, it doesn’t guarantee that there will be no rate hikes in the future.

In April RBI governor Shaktikanta Das clarified that the apex bank’s decision to maintain repo rates at 6.50 percent was “a pause and not a pivot”. Now in June, with the RBI again maintaining status quo, Das said, “Whatever I said in the last meeting that it is not a pivot, I reiterate that,” meaning basically that if the situation warrants it, the RBI will not hesitate in hiking rates again.

But probabilistically speaking and assuming there are no fresh unexpected inflation triggers, a series of rate hike pause decisions might be a good sign. And once the inflationary pressures in the economy ease, the RBI will be in a comfortable position to begin cutting rates again. When this happens, the rate cuts will be passed on to borrowers (though slower than rate hike passes) and lead to a reduction in loan EMIs and interest burden.

That begs the question: How soon can we expect a rate cut?

We don’t know, to be honest. No one does. But the RBI’s decision will depend on incoming data. And the latest CPI data that came yesterday at 4.25% which was below previous months 4.70% offers some hope.

So, for borrowers, given that rates will come down in the near future, it is better to stick with floating-interest-rate loans for now, even if you rare getting offers for fixed-rate loans at slight discounts compared to floating-rate loans.