Effect of REPO rate increase on EMIs

Reserve Bank of India has recently hiked its REPO Rates. The MPC unanimously voted to increase the policy repo rate by 50 basis points to 4.90%.  After enjoying decadal low interest rates, borrowers will now have to brace for continuous interest rate hikes on their loans. This is because the Reserve Bank of India (RBI) in its monetary policy meeting held on June 08, decided to increase the repo rate again by 0.5% to 4.9%. This comes within 36 days of last repo rate hike of 40 bps done on May 4, 2022. New borrowers and existing floating rate borrowers like home loan borrowers will have to dole out higher EMIs for their loans

How much EMI will increase?

• After the current hike, the total increase in repo rate is 0.9%.
• Due to the rate hikes by the central bank, lenders like banks and housing finance companies, will increase their lending rates correspondingly. This means that your EMIs will go up accordingly.
• For example, if you have a home loan with Rs 30 lakh outstanding with a balance tenure of 20 years at 7% pa interest, your EMI will go up by Rs 1,648 from Rs 23,259 to Rs 24,907. For each lakh rupee of loan, you may have to dole out Rs 55 extra for EMI.
• Similarly for an auto loan of Rs 8 lakh for a tenure of 7 years if the interest rate rises from 10% to 10.9% the corresponding increase in EMI will be Rs 375 from Rs 13,281 to Rs 13,656.
• On a personal loan of Rs 5 lakh with a tenure of 5 years, if the interest rate rises from 14% to 14.9% your EMI will increase by Rs 235 from Rs 11,634 to Rs 11.869.
• These two hikes in quick succession do not look like the end of the rate hikes. Inflationary factors are yet to show any durable sign of subsiding.
• The Executive Vice Presidnet and Debt Investments, Kotak Mahindra Life Insurance adds that, we may have seen the peak of inflation for now, but we may not have seen the end of it yet.

It is felt that till the time inflation comes down within the comfort zone of RBI, which 2-6%, it will be compelled to exercise the interest rate hike option among other inflation control options.