RBI hikes repo rate by 25 bps; your EMIs will rise, but here's how home buyers can help themselves

The Reserve Bank of India’s (RBI) second bi-monthly monetary policy for India turned out to be a very surprising, even shocking, event. In this policy, RBI actually increased the repo rate and other indicators by 25 basis points. This was the first time the repo rate has been hiked  by the Narendra Modi government. Notably, the big decision was taken after RBI governor Urjit Patel along with six-member Monetary Policy Committee held a 3-day meet for the first time in history and then decided to go for a rate hike. This policy rate hike was on the back of factors which are exerting pressure on the  Consumer Price Index (CPI). The hike will have a direct impact on deposits and lending method of banks, which in turn would weigh on EMIs a consumer pays for loans either personal, home or vehicle. 

Now, policy repo rate under Liquidity Adjustment Facility (LAF) stands at 6.25% from previous 6%. Consequently, the reverse repo rate under the LAF stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.

Home loan has greater exposure to the repo rate and this segment is likely to be hit. Housing loans account for 12% of the total credit disbursed by banks. 

Adhil Shetty, Co-founder and CEO, BankBazaar.com on RBI’s current policy said, “The decision is on expected lines and a well-thought out precautionary move to stay ahead against a backdrop of global volatility in crude and elevated commodity inflation worldwide. The move has reined in inflationary expectations which will help cushion the rupee as well.

Shetty added, “The central bank has further retained its GDP growth projection for 2018-19 at 7.4% and for banking sector in particular,  RBI has allowed 2% more SLR (statutory liquidity ratio)  to meet liquidity coverage ratio. This will particularly help banks in distress.” 

Going ahead, Shetty also advised homebuyers in saving themselves from the effects of this policy repo rate hike.

According to Shetty, an existing borrower may not immediately witness any change in his EMI amount, but a higher interest rate would eventually increase the long-term interest out-go. One of the ways to borrowers can protect themselves is by making a pre-payment that would lower your overall interest outgo. This would be particularly a good move for those at the beginning of their loan tenure. 

But if you are nearing the end of your loan, it is wise not to take any steps and simply maintain the loan till the end of its tenure to collect any useful tax deductions. You can also adopt a wait and watch policy for a quarter and take time to understand the impact of the rate hike on your loan. If there is a significant impact, you can explore transferring the home loan to other banks after a comparison of the rates offered to grab the best deal.   

Simultaneously, you can also increase your savings or step up your investments to pre-pay your loan so that the interest outflow is not as high.

An EMI is a fixed amount of money that a borrowers needs to pay on a monthly basis to lenders or financial institutions, towards the loan amount they have taken.