RBI's Repo Rate: How a change in repo rate can impact your home loan EMI

RBI's Repo Rate: As the Reserve Bank of India (RBI) is set to unveil the repo rate after the monetary policy meeting (MPC) on Friday, June 7, 2024, many will focus on home loan interest rates. Lenders change home loan interest rates when the RBI changes the repo rate. Since February 8, 2023, the central bank has kept the repo rate unchanged at 6.50 per cent. In the upcoming meeting, it is uncertain whether the rate will be changed or not. Let's decode the relation between the RBI's repo rate and home loan interest rates.

According to Atul Monga, CEO and Co-Founder of Basic Home Loan, a change in the RBI's repo rate directly impacts home loan EMIs. He further explained that the repo rate is directly proportional to loans, including home loans, meaning that whenever the central bank increases or decreases the rate, it similarly affects the loan or the EMIs.

Increased borrowing cost for banks: When the RBI raises the repo rate, it becomes costlier for banks to borrow money from the central bank.

Higher interest rates on home loans: To maintain their profit margins, banks typically pass on the increased borrowing costs to their customers. This translates into higher interest rates on new and existing home loans linked to the repo rate (floating rate loans).

Increased EMI burden: As the interest rate rises, the EMI amount for your home loan increases proportionally, which can put a strain on your monthly budget.

'Existing home loan borrowers with floating interest rates feel the impact immediately, while those with fixed rates experience changes only when their loan terms reset or upon refinancing,' he added. Therefore, the RBI’s repo rate adjustments are a crucial tool affecting housing affordability and loan repayment dynamics."

What if RBI cuts repo rate

If the RBI cuts the repo rate in an upcoming meeting then how it can be good for home loan borrowers:

Reduced borrowing costs for banks: A decrease in the repo rate makes it cheaper for banks to borrow from the RBI.

Lower interest rates on home loans: Banks react with reducing interest rates on home loans, making them more attractive to borrowers. This can lead to a decrease in existing EMIs for those with floating rate home loans.

Potential for increased loan demand: Lower interest rates can stimulate demand for home loans, as borrowing becomes more affordable.

The RBI maintained the repo rate at 6.5 per cent in the last monetary policy meeting, i.e., April 5, 2024. This indicates a period of relative stability in borrowing costs. However, it's essential to stay updated on future RBI decisions, as they can directly impact your home loan EMI.

Will RBI make any update or change in the repo rate?

According to economists surveyed by Zee Business, the RBI is expected to keep the repo rate unchanged at 6.5 per cent in the current MPC meeting.

Tips for the borrowers

Loan type selection: Choose a floating-rate loan if you anticipate future repo rate cuts for potentially lower EMIs. However, if you prefer stability, a fixed-rate loan might be a better option.

Track repo rate decisions: Keep yourself updated on the RBI's monetary policy decisions.

Refinancing options: If interest rates fall significantly, consider refinancing your existing home loan to potentially benefit from a lower EMI.