EMI shock ahead? RBI rate hike could raise your monthly burden

KOCHI: Borrowers could face higher monthly repayments in the coming months if the Reserve Bank of India (RBI) raises its repo rate as expected. Rising crude oil prices and the depreciation of the rupee have added to inflationary pressures, fuelling expectations of a possible rate hike.

Most economists expect the RBI to raise its key policy rate by 25 basis points to 5.5% at the Monetary Policy Committee meeting scheduled for October 5–7. The repo rate currently stands at 5.25%.

A rate hike could increase borrowing costs for customers with floating-rate loans linked to the repo rate. The impact would depend on the terms of individual loans and the applicable interest-rate benchmark. Depending on their loan agreements and repayment arrangements, banks may raise equated monthly instalments (EMIs) or extend repayment periods.

SBI Research has recommended that the RBI raise the repo rate by 25 basis points in October and another 25 basis points in December, citing persistent external shocks, elevated crude oil prices and signs of broader inflationary pressures. The report also warned that consumer price inflation could move towards 6.5% or higher in October and November if crude oil prices remain elevated.

Challenges facing the RBI

• Rising inflationary pressures
• Elevated crude oil prices
• Depreciation of the rupee
• Global interest-rate pressures

What happens when interest rates rise?

Higher interest rates increase borrowing costs and can curb consumption and demand for credit. A rate hike could help moderate inflationary pressures and support the rupee, although the actual impact would depend on domestic and global economic conditions.

How much could your EMI increase?

For illustration, consider a Rs 50 lakh home loan with a 20-year repayment period. If the interest rate rises from 8% to 8.25% and the repayment tenure remains unchanged, the monthly EMI would increase from approximately Rs 41,822 to Rs 42,603.

This would mean an additional monthly outgo of around Rs 781, or Rs 9,372 a year. The actual increase for an existing borrower would depend on the outstanding loan balance, remaining tenure, interest-rate reset date and the lender's repayment arrangements.