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RBI hikes repo rate, home, car loans EMI to go up; here's what you can do

With the most recent increase, the repo rate, or the short-term lending rate at which banks borrow from the central bank, has now surpassed 6 per cent. This is the fifth consecutive rate increase, following a 40-basis-point increase in May and 50-basis-point increases in June, August, and September. Since May of this year, the RBI has raised the benchmark rate by 2.25 per cent.

RBI hikes repo rate, home, car loans EMI to go up; here's what you can do - adt
First Published Dec 7, 2022, 1:34 PM IST

The Reserve Bank of India (RBI) raised the benchmark lending rate by 35 basis points (bps) on Wednesday, the fifth increase since May, saying it is committed to keeping inflation under control. The rate hike will increase the cost of loans, including housing, auto loans, and corporate credit.

"This rate hike may have a negative impact on home sales," said Cyrus Mody, Managing Partner at Viceroy Properties. However, it appears unlikely, given the strong traction we are seeing, as most buyers are looking for self-use rather than investment. As we advance, we anticipate demand for projects developed by reputable names will remain strong, with pricing power."

The Repo rate is the rate charged by the Reserve Bank of India to commercial banks when they borrow money from it. When the central bank raises the repo rate, the cost of lending for retail and other bank loans rises.

The interest for fixed-rate loans, such as personal loans, remains the same throughout the term. However, some retail loans, such as home loans and auto loans, are linked to an external benchmark set by the Reserve Bank of India. Most banks and non-banking financial companies (NBFCs) have linked their lending rates to the central bank's repo rate. As a result, when the repo rate rises, so does banks' repo rate linked lending rate (RLLR).

According to the CEO and co-founder of BASIC Home Loan, Atul Monga, an increase in interest rates will be felt, especially by new borrowers. Existing borrowers will not usually be affected as the change in rate will not refer to them as it is related to future borrowings.

Existing home loan borrowers can reduce their equated monthly instalments (EMI) or loan tenures to mitigate the impact of rising interest rates. Borrowers can also consider the prepayment option to save money on rising interest rates. "It is still advisable to consider various payment strategies to minimise the impact of this rate hike," Monga said. This could include a home loan balance transfer or making extra payments. In such a case, the borrower will have more control over inflated interest rates and economic stability."

Also read: RBI hikes Repo rate by 35 bps to 6.25%, lowers GDP growth projection to 6.8%

Also read: India, Singapore to link UPI to enable easy and instant money transfers; check details

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