New Delhi, 07 October (H.S.): The Reserve Bank of India’s Monetary Policy Committee (MPC) has taken a major decision to raise policy rates to contain inflationary pressures in the country. The central bank has increased the repo rate by 25 basis points, or 0.25 percentage points, making borrowing more expensive than before. The concern is that an immediate cut in interest rates is also unlikely.
Announcing the monetary policy decision, Reserve Bank of India Governor Sanjay Malhotra ruled out the possibility of an interest-rate cut in the near term. He made it clear that, depending on economic conditions and the inflation trajectory, the RBI’s next move could either be another rate hike or keeping rates at the current level. Following the decision, banks are likely to gradually pass on the higher interest-rate burden to customers, which is expected to affect household monthly budgets.
Tarakeshwar Nath Vaishnav, CEO of TNV Financial Services, believes that the most direct and significant impact of the RBI’s move will be felt by home-loan borrowers who have opted for floating interest rates. Such loans are directly linked to an external benchmark, namely the repo rate. Following the rate hike, interest rates on home loans offered by banks are likely to rise. As a result, borrowers may either have to pay higher monthly equated monthly instalments (EMIs) or face an extension of their loan tenure.
According to Vaishnav, in view of prevailing global uncertainties, fluctuations in crude oil prices and the situation in West Asia, the RBI has taken this stringent measure with the objective of keeping inflation under control. He also said that the rate hike is unlikely to have any significant negative impact on the strong demand and buyer sentiment currently prevailing in the real estate market during the festive season. However, the real estate sector could be significantly affected once the festive season comes to an end.
Market experts believe that the 25-basis-point increase in interest rates could have a considerable impact on the finances of middle-class households. Vaishnav said that if an individual has taken a home loan of Rs 50 lakh for a tenure of 25 years, the relatively small increase in the interest rate could raise the monthly EMI by around Rs 816.
Over the entire tenure of the loan, the additional burden would amount to approximately Rs 2.45 lakh in interest payments. Similarly, the monthly EMI on a Rs 30-lakh loan could rise by around Rs 490, while that on a Rs 40-lakh loan could increase by approximately Rs 654. Alternatively, borrowers who do not want their monthly EMI to increase could see their repayment period extended by around 22 months, meaning that a 25-year loan could take nearly 27 years to repay.
The impact of the decision will vary among different categories of borrowers. Customers with floating-rate loans will begin to feel the increased burden once their respective loan-reset cycles are completed. However, banks may offer borrowers the option of either increasing their monthly instalment according to their convenience or extending the loan tenure.
On the other hand, borrowers who already have home loans at fixed interest rates will not see any immediate change in their existing EMIs. However, if they plan to refinance their loans in the future or take a new loan from the market, they will now have to pay interest at higher rates than before.
Experts say that following the repo-rate hike, the cost of funds for banks will increase. This will directly affect customers taking car loans and personal loans, in addition to home loans. New loans will become more expensive, while the EMIs or repayment tenures of existing floating-rate loans may increase. On the other hand, the development is positive news for savers, particularly senior citizens. Banks may raise interest rates on fixed deposits and savings accounts to strengthen their liquidity, enabling depositors to earn higher returns on their savings.
Vaishnav also said that higher interest rates could lead to a modest slowdown in credit growth, or demand for loans, within the banking system, as consumers may become more cautious about borrowing when loans become more expensive. At the same time, attractive interest rates on fixed deposits could increase the flow of deposits into banks. In such a situation, banks will have to work harder to maintain a balance in their net interest margins (NIMs).
The Reserve Bank of India has taken this step primarily to contain the projected inflation rate of 5.2 per cent. By reducing the flow of liquidity in the market, the measure is intended to moderate demand and thereby help curb rising prices. However, higher interest rates could make corporate expansion plans more expensive, potentially slowing the pace of economic activity to some extent. Despite this, the RBI remains confident that the country’s economic engine is strong and has therefore retained its GDP growth forecast for financial year 2026-27 at 7.1 per cent.
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Hindusthan Samachar / Jun Sarkar
