Home loan burden to skyrocket as RBI set to raise repo rate further

RBI Repo Rate Rise: The floating interest rates of a bank’s real estate loans must be linked to an external reference, which for most banks is the repo RBI rate. So, whenever the RBI repo rate is revised, there is a direct impact on a borrower’s EMI or tenure. As the transmission of the repo rate is immediate, the borrower sees the impact on the mortgage interest rate within three months. When the repo rate increases, the loan rate linked to the repo rate (RLLR) also increases, thus resulting in an increase in the interest rate of the mortgage for the borrower. However, instead of increasing the EMI, in most cases the loan tenure is increased by the banks.

The previous RBI rate hike was 0.4%, while another hike of 0.6% will take the repo rate hike to 1% or 100 basis points. The entire 100 basis point increase will reflect an increase in the interest rate on home loans.

Assuming an outstanding loan of Rs 35 lakh, a 1% increase in the interest rate increases the interest burden by nearly 8% (about Rs 3.6 lakh), holding all other factors constant.

At 7.1% (on Rs 35 lakh)

EMI – Rs 31,655

If the rate increases by 100 basis points or 1%, then to 8.1% (on Rs 35 lakh)

EMI – Rs 33,650
Interest paid – Rs 25,57,000

The Reserve Bank of India (RBI), in its first meeting of the Monetary Policy Committee (MPC) for the financial year 2022-23, held in April 2022, had kept policy rates unchanged. But then came the surprise increase in the rates of 0.4 %. Going forward, the RBI is expected to further increase the repo rate, which will have an impact on borrowing costs.

Here’s what experts expect from RBI during the June 6-8, 2022 policy.

The RBI’s Monetary Policy Committee, led by the Governor, began its bi-monthly review this morning and will watch the effect of factors such as high inflation fears and changing geopolitical situations leading to overvaluation of various commodities basic.

The resolution is expected on June 8 and it would be obvious that benchmark lending rates will be raised again.

Expectation of rate hike: It is expected that by the end of the current financial year, the RBI may raise the Repo rate up to 5.60%, which is currently at 4.40%.

Lakshmi Iyer, Chief Investment Officer (Debt) and Head of Products, Kotak Mahindra Asset Management

The off-cycle rate hike has expectations intimately from the front-end expectations of rate hike decisions by RBI. With the U.S. yet to cave in to moderating the pace and quantum of rate hikes, and inflation showing no immediate signs of slowing, it looks like another rash decision to raise rates in future policy.

Expectation of rate hike: The amount of the increase in rates (40 to 50 base points in our opinion) will be a key determinant in the extrapolation of the terminal repo rate for the year 2023.

Churchill Bhatt, Executive Vice President and Debt Investments, Kotak Mahindra Life Insurance

We may have seen the peak of inflation for now, but we may not have seen the end of it yet. And not lowering inflation even after the central bank has reached the neutral rate has the possibility of destabilizing the economy. Therefore, failure to contain the inflation genie should scare markets more than policymakers struggle against it.

Expectation of rate hike: We expect the MPC to offer a non-certification policy rate hike of 25-40 BPS (basis points) in June.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank

The MPC signaled a gradual withdrawal of accommodation in light of higher inflation. It is likely that the position of the RBI will be “neutral” while remaining determined to bring back inflation closer to the levels targeted by all possible instruments.

Expectation of rate hike: I expect a rate hike of between 35 and 50 basis points in June policy. Based on inflation data and external factors, including oil and commodity prices, expect a total increase of 100-150 basis points in the repo rate from the current 4.40%.

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank

We expect the MPC to revise the trajectory of inflation from 70 to 80 base points, taking into account the upward pressures on prices. GDP estimates may remain unchanged for now. From a policy withdrawal perspective, RBI over the past two months has moved quite aggressively and quickly. The weighted average overnight rates have risen 80-90bps since the MPC’s policy in April.

Expectation of rate hike: We expect an increase in replenishment rates of 35 to 40 base points and the status quo on the CRR in the June policy to come.