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Both existing and new retail borrowers will now pay higher equated monthly instalments (EMIs) for their home loans and loans against property, after the Reserve Bank of India (RBI) hiked the repo rate by 40 basis points (bps) on Wednesday.

Car loans too will become more expensive for new borrowers. However, those who have taken a loan at a fixed interest rate will be spared.

For any existing contractual deposit such as bank term deposits or recurring deposits, the rate will not change. However, if banks increase interest rates on fresh deposits, savers will gain.

Impact on home loan borrowers
The proportion of floating rate loans linked to the external benchmarks, such as repo rate, was around 40% as of December last year. At present, over two dozen lenders offer home loans under 7%, but the days of sub-7% rates may be coming to an end.

With the repo rate hike, floating rate loans will get costlier and all new loans are likely to be priced higher.

On a home loan of Rs 50 lakh for 20 years at 7%, the EMI today is Rs 38,765 and the interest payout for the full tenure would be Rs 43.03 lakh.

If the rate increases to 7.4%, the EMI will go up to Rs 39,974 and the total interest payout for the full tenure will increase to Rs 45.93 lakh. In other words, the EMI will rise by Rs 1,209.

Adhil Shetty, CEO, BankBazaar.com, says if a borrower is on a floating rate loan, the EMI may be fixed for the tenure, but the tenure itself will increase with the hike. “To tackle this hike, you could refinance to a lower rate, increase your EMIs, and make pre-payments regularly,” he explains.

Impact on other loans
Personal and auto loans typically attract fixed rates. For those who have already taken these loans, there’s nothing to worry about, as the EMIs and interest rates would remain the same. However, loans with floating rates will become costlier, as will new loans.

For an auto loan of Rs 4 lakh for 5 years at 7.5%, the EMI is now Rs 8,015 and the total interest payout is Rs 80,911. If the rate rises to 7.9%, the EMI will increase to Rs 8,091 and the total interest payout will go up to `85,486.

Impact on fixed deposits
Deposit rates are decided by banks’ asset liability management committees after factoring in the existing deposit base, requirements of funds, the maturities of requirements and existing loans, and the prevailing rates in the market. With the hike in repo rate, bank deposit rates may also increase.

Typically when interest rates rise, deposit rates of short and medium tenures rise initially, followed by long-tenure deposits. Joydeep Sen, a fixed income expert, says the rate hike by the RBI would lead to higher deposit rates. “But any meaningful transmission of higher deposit rates will take time as banks have surplus liquidity today,” he says.



Author: Howard Caldwell