Wealth Guide: RBI Policy Impact - Which rates are affected by rate hikes? What loan borrowers should do? Expert advice

Wealth Guide: RBI Policy Impact: Reserve Bank of India (RBI) on raised the interest rate by 50 basis points to a two-year high of 4.9 per cent as it doubled down to tame inflation that has surged in the last couple of months. The rate hike comes on the back of a 40 bps increase effected by RBI at an unscheduled meeting on May 4.  All the six members of the Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted for the latest rate hike. Consumer Price Index (CPI) based inflation, which RBI factors in while arriving at its monetary policy, galloped for the seventh straight month to touch an 8-year high of 7.79 per cent in April. Naveen Kukreja, CEO & Co-founder, Paisabazaar.com, decodes that RBI MPC policy impact - which rates are affected by rate hikes and what  borrowers should do now.

Explaining the rates that are affected by rate hikes, Naveen Kukreja said, "Floating rate retail loans linked to repo rates would have faster transmission of rate hikes. The transmission would be quicker for fresh floating rate loans. However, the exact date of the lending rate hikes by the banks for new borrowers would depend on their rate reset dates set as per their guidelines. In case of existing floating rate loans linked to external benchmarks, the borrowers would be charged higher rates based on their next interest reset dates. Till then, they would continue to pay their existing interest rates.  The transmission of rate increases for fresh home loans offered by HFCs and NBFCs could be a bit slower as HFCs and NBFCs can exercise greater discretion in managing their home loan rates."  

"As higher repo rates would eventually increase the cost of funds for the lenders, floating rate loans linked to MCLR and previous benchmarks would be eventually increased by the lenders depending on the change in their cost of funds. The existence of low cost deposits in their liabilities portfolio could absorb some impact of sharp repo rate hikes.

In his advice to borrowers amid a rising rate scenario, Kukreja said, "The reversal in the interest rate regime should lead to a steady increase in the borrowing cost in the near term. Thus, borrowers of floating rate loans, including home loans, should expect their EMIs and overall interest cost to steadily increase in the near term. Those who have not opted for the EMI increase option would instead have their loan tenure increased. The increase in interest cost would be higher for the tenure increase option than the EMI increase option. Thus, existing floating rate borrowers having adequate surpluses should try to prepay their loans and preferably opt for the tenure reduction option to generate higher savings in interest cost."

He suggests, "Home loan borrowers, both fresh and existing ones, having restricted liquidity can opt for the home saver option. Under this facility, an overdraft account is opened in the form of savings or current account where the borrower can park his surpluses and withdraw from it as per his financial requirements. The interest component of the loan is calculated after deducting the surpluses parked in the savings/current account from the outstanding home loan amount. Thus, home loan borrowers would be able to derive the benefit of making prepayments without sacrificing their liquidity."

"Existing home loan borrowers who have witnessed substantial improvement in their credit profile; should explore the possibility of interest cost savings through home loan balance transfer. Their improved credit profile may make them eligible for home loans at much lower rates from other lenders," he concluded.