The Reserve Bank of India’s (RBI’s) decision to keep the policy repo rate unchanged offers significant relief to home loan borrowers. As RBI maintains a status quo, the equated monthly installments (EMIs) are unlikely to see a surge. Borrowers who were bracing for a hike can breathe a sigh of relief.
The RBI’s Monetary Policy Committee (MPC) has decided, for the fifth time this year, to keep the key policy rate unchanged at 6.5 per cent. The last revision to the repo rate happened in February, when it was increased to 6.5 per cent following a 25 basis point hike. Repo rate hikes were initiated in May 2022 following a global spike in inflation resulting due to geopolitical tensions.
Today’s announcement to keep the repo rate unchanged has come at a time when inflation, though showing signs of easing, remains a nagging concern. Crude oil prices are showing signs of easing, and may contribute to bringing about global economic stability. As a result, the possibility of the central bank slashing rates may be on the cards. Today’s announcement to maintain the pause on the key rates will provide continued relief to borrowers, especially with regards to managing debt and household expenses.
Adhil Shetty, CEO of BankBazaar.com, said, “As the repo rate skyrocketed from 4% to 6.5% over the last 20 months, the debt burdens of home loan borrowers ballooned, as EMIs increased and loan tenures extended, sometimes well beyond retirement age. The BankBazaar Aspiration Index, an annual study that studies key aspirations of people, year-on-year, revealed that more than half of the survey’s respondents saw their interest rates rise by 1-3% and their EMIs go up by approximately Rs 2,000-10,000. On average, borrowers who started their loans with an average interest rate of 7% have seen it go up to 9.5%, following the rate hikes. EMIs, too, have gone up by Rs 158 per lakh, from Rs 775 to Rs 932 per lakh. To combat the pressure of the rate hikes, existing borrowers can explore switching to lower home loan rates and continue to prepay a part of the loan to reduce the burden.”
One should understand that the repo rate, the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds, currently stands at 6.5%. The central bank’s decision to maintain the status quo implies that the cost of borrowing for banks remains unchanged. Consequently, banks may show no haste in reducing the lending rates, thereby having no immediate influence on the borrowing costs for home loans. Therefore, an immediate reduction in home loan EMIs remains uncertain.
Also read: RBI MPC: Governor Shaktikanta Das keeps repo rate unchanged at 6.5% for fifth consecutive time
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While borrowers can revel in unchanged EMIs, investing in low-risk products like FDs is an opportune moment. “Fixed deposits have also witnessed greater interest following the rate hikes. Customers can lock in their money in FDs of shorter tenures, offering higher returns. To maximise returns, they can also explore strategies such as laddering,” said Shetty.
Anshul Gupta, Co-Founder and Chief Investment Officer of Wint Wealth, said, “The retail inflation in October was 4.87%% per annum, within the RBI’s 4-6% tolerance band. However, the RBI governor has reiterated that the central bank wants the inflation to decrease to 4%. Thus, there was no change in the key policy rates for the 5th consecutive time. We expect that the key policy rates will come down post-Q2 2024. Gradually, the market will start factoring this, which will have a downward impact on the FD returns of various banks, small finance banks, and NBFCs. Given the context, this is the best time to lock your money into high-return FDs. Small finance banks are a good choice as they offer about 1-2% per annum extra interest compared to most established banks. Some banks are trying to sell floating-rate FDs. Investors would do well not to invest in these FDs, as the interest rates are expected to decrease in the near future.”