No respite on home loan EMIs yet as RBI keeps rate paused; can you expect good news soon?

When it comes to your home loan EMI, can you expect good news from the RBI anytime soon? The central bank on Thursday maintained a status quo on the repo rate — the benchmark rate that determines the interest you bear on your home loan — as well as its policy stance, as widely expected.

Currently, the repo rate stands at 6.5 per cent. The latest pause in the repo rate by the RBI's Monetary Policy Committee — the central bank's panel that decides interest rates in the country — follows a similar move in its April review.

The MPC's latest bi-monthly review comes at a time when major central banks around the globe are committed to taming red-hot inflation without disrupting the pace of economic growth. 

When can you expect the RBI to announce a repo rate cut?

Many experts believe the RBI will likely start to reduce the key lending rate later this year or early next year, with the tightening cycle now being behind. Some say the rate is likely to only come down from the current level given the RBI's commentary on inflation.

Market veteran Ajay Bagga believes the first reduction in the repo rate can be in October or November.

So, are lower home loan EMIs on the cards for existing borrowers?

A respite for home loan customers "can only happen if and when repo rates come down and banks reduce their interest rates" accordingly, Anuj Puri, Chairman of property consultant ANAROCK Group, told Zeebiz.com. 

"Alternately, interest rates can come down if banks announce promotional lending rates to fuel interest, as was seen during the first phase of the pandemic," Puri added. Read more on what experts make of the latest RBI status quo

Is it too soon to pin hopes on lower interest rates? Well, the central bank, which tracks inflation closely for formulating its monetary policy, lowered its forecast for consumer inflation by 10 basis points to 5.1 per cent for the year ending March 2024 citing "evenly-balanced risks". 

"The worst (of rate hikes) seems to be over. Interest rates are stabilising. Inflation permitting, we may see rates drop before the end of 2023. If you’re on a repo-linked loan, your rate should automatically reset after any repo rate change within a quarter," said Adhil Shetty, CEO of BankBazaar.com, an e-marketplace for financial products. 

"The lowest rates being offered in the home loan market today are in the 8.4-8.5 for eligible borrowers. If you’re paying a significantly higher rate, consider a refinance," he said. 

What is the repo rate and how does it impact your home loan EMI? 

Essentially, any reduction in the repo rate should be reflected by commercial banks in their products such as home loans — something known in banking parlance as rate transmission — and vice versa.

In other words, the loans offered by the banks to their customers should also bear lower interest rates after the RBI's rate cuts, thereby lowering the borrowers' EMI burden. On the contrary, commercial banks raise their interest rates in case the RBI raises the repo rate.  

On the contrary, This is because commercial banks acquire funds from the central bank at higher prices, which forces them to bump up their lending rates.

Can borrowers expect lower EMIs every time the RBI cuts the repo rate?  

In general practice, any hike in the repo rate is followed immediately by related adjustments by commercial banks, which often take time to adjust their rates in case the RBI lowers the repo rate. This is why the RBI has flagged delayed or weak rate transmission in the past years. 

As a solution, the RBI introduced a new regime, introducing marginal cost-based lending rates (MCLR) which are the rates below which commercial banks cannot lend. Currently, certain types of loans — or those with floating rates of interest — are linked with the MCLR and others with the external benchmark.

What does the latest pause in repo rate mean for potential home buyers?

The pause on the repo rate gives some respite to prospective homebuyers looking to avail of home loans in the near future, said ANAROCK's Puri. 

"The outlook for those looking to buy their first home via a home loan soon remains favourable. Interest rates from most banks will continue in single digits," he added. 

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