The Buyt Desk
On the 4th of May 2022, the Reserve Bank Of India (RBI) made a surprise move. It announced a hike in the repo rate and other policy rates that directly influences the economy and the common public. RBI raised the repo rate by 40 basis points after keeping it at the status quo for two years. An increase of 100 basis points is equal to 1%.
Although this hike does not translate into bad news for everyone. It is a positive move for investors who invest their money in fixed deposits and a negative for loan borrowers. The hike in repo rate means the interest on FDs is likely to continue increasing and also increase the interest rates of borrowed loans.
Here is an example of how the home loan interest rate would rise after the hike in the repo rate.
Suppose Rohan has taken a loan of 30 lakh for the tenure of 20 years with the current interest rate of 6.75%. For Rohan, the EMI with the prevailing interest rate would be Rs 22811. With the increased repo rate, the new interest rate will be 7.15%, and the new EMI will be 23,530. Rohan will have two option, he pays the increased EMI or increases the tenure of the loan. If your loan is on a floating rate and is linked to an external benchmark system then the banks will auto rest your loan and increase the loan tenure.
We have taken the example of a home loan because the change in repo rate will impact the home loan borrowers the most.
RBI Set Rule For The Home Loan Interest Rate
RBI revised the rules for the home loan interest in the year 2019. According to that, the banks have to link their home loan interest rate to external benchmarks set by RBI. The external benchmarks are:
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The repo rate of the Reserve Bank Of India.
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GOI 3-months treasury bill yield as published by Financial Benchmarks India Pvt. Ltd. (FBIL).
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GOI 3-months treasury bill yield as published by FBIL.
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FBIL published any other interest rate benchmark.
The final interest rate incurred by the personal or the retail loan borrowers would be calculated as “External Benchmarks Rate +Risk Premium +Margin”
Additionally, according to the RBI’s regulations, banks must review and revise the interest rates on loans linked with any external benchmarks mentioned above at least once in three months. Based on this calculation, any increase in the external benchmarks rate would boost the home loan interest rate within three months.
