The Reserve Bank of India (RBI) has raised the repo rate by 25 basis points to 6.50% with immediate effect, as widely expected. Following the latest repo rate rise by the RBI on February 8, banks are anticipated to boost interest rates on retail lending. As a result, it is critical for the average Indian to understand how the Reserve Bank of India’s (RBI) decision to raise repo rates may affect one’s monthly EMI.
Loan EMIs will rise
It is true that an increase in bank interest rates will have a direct impact on new loan borrowers and bank depositors. Following the repo rate rises, banks raise the interest rate on their retail loans, and after the loan interest rate hike, they generally extend the loan term rather than the monthly EMI.
The extent to which banks pass on the benefit of the February policy rate boost to their FDs will be closely monitored.
The central bank hiked the main benchmark interest rate (repo) by 35 basis points (bps) at its December monetary policy review, following three consecutive rises of 50 bps.
Since May of last year, the RBI has raised the short-term lending rate by 225 basis points to combat inflation, which has been mostly driven by external causes, including global supply chain disruption caused by the Russia-Ukraine conflict.
The repo rate is now 6.25%. For FY23, the RBI raised rates by 40 basis points in May, followed by three consecutive rate hikes of 50 basis points each from June to October, and then some relaxation to 35 basis points in December policy.
