Home and car loans to get costlier: RBI hikes repo rate by 0.50% to 5.90% from 5.40%

Worried about rising inflation, the Reserve Bank of India (RBI) has hiked the repo rate by 0.50%. Along with this, the repo rate has gone up from 5.40% to 5.90%, meaning every loan from home loan to auto and personal loans can become expensive and you will have to pay more EMIs.

The meeting of the Monetary Policy Committee is going on from September 28 to take a decision on interest rates. RBI Governor Shaktikanta Das will soon give an update on interest rates in a press conference. In the meeting held in August, the interest rate was increased from 4.90% to 5.40%.

1.40% increase in four months

Monetary policy meeting is held every two months. The first meeting of this financial year was held in April. The RBI then kept the repo rate steady at 4%, but the RBI called an emergency meeting on May 2 and 3 and raised the repo rate from 0.40% to 4.40%.

This change in repo rate was made after 22 May 2020. This was followed by an increase in the repo rate by 0.50% in the monetary policy meeting held on June 6-8. Due to this the repo rate was increased from 4.40% to 4.90%. It was then increased by 0.50% to 5.40% in August.

What did the RBI Governor say?

• The whole world is going through crisis
• Fluctuations in stock markets around the world
• 5 out of 6 MPC members are in favor of raising interest rates
• Inflation is a concern for all sectors
• SDF increased to 5.65% from 5.15
• Demand will be good in the second quarter of FY23

How much of a difference would a 0.50% rate hike make?

Suppose a person named Rohit has taken a home loan of Rs.30 lakh for 20 years at an interest rate of 7.55%. Their loan EMI is Rs. 24,260 is In 20 years he has to pay interest of Rs 28,22,304 at this rate, meaning he has to pay a total of Rs 58,22,304 instead of Rs 30 lakh.

A month after Rohit took the loan, the RBI hiked the repo rate by 0.50%. Banks also increase the interest rate by 0.50% for this reason. Now when a friend of Rohit comes to take a loan from the same bank, the bank tells him 8.05% interest instead of 7.55%.

Rohit’s friend also takes a loan of Rs 30 lakh for only 20 years, but his EMI comes to Rs 25,187, meaning that Rohit’s EMI is Rs 927 more, due to which Rohit’s friend has to pay a total of Rs 60,44,793 in 20 years. 2,22,489 more than Rohit’s amount.

Will EMI increase on existing loans?

Home loan interest rates are of 2 types, first is floater and second is flexible. In a floater, your loan interest rate remains the same from start to finish. This is unaffected by changes in the repo rate and on a flexible interest rate change in the repo rate also affects your loan interest rate, so if you have already taken a flexible interest rate loan then your loan EMI will also increase.

Why does RBI increase or decrease repo rate?

RBI has a powerful tool to fight inflation in the form of repo rate. When inflation is too high the RBI tries to reduce the flow of money into the economy by raising the repo rate. If the repo rate remains high, the loans given by the RBI to the banks will become expensive. In turn banks will make loans more expensive for their customers. This will reduce the flow of money in the economy. If the flow of money decreases, demand will decrease and inflation will decrease.

Similarly, when the economy goes through a bad phase, there is a need to increase the flow of money for recovery. In such a situation, RBI can reduce the repo rate due to which banks get cheaper loans from RBI and customers also get loans at cheaper rates. This should be understood by the fact that when the economic activities came to a standstill during the Corona period, the demand decreased. In such a situation, RBI increased the flow of money in the economy by reducing interest rates.

What happens when the reverse repo rate increases or decreases?

The reverse repo rate is the rate at which the RBI pays banks interest on holding money, when the RBI wants to reduce liquidity from the market it increases the reverse repo rate. Banks take advantage of this by earning interest on their holdings with the RBI. RBI increases the reverse repo rate during high inflation in the economy. Due to this, banks have less funds to lend to customers.