The repo rate has a directly proportional relationship with the interest rate on loans. Any increase in the repo rate will translate to an increase in the interest payments on your outstanding loans.
The Reserve Bank of India (RBI) has announced an increase in the repo rate by 25 basis points to 6.5%. RBI has been consistently increasing the repo rate since June 2022. The cumulative increase in the repo rate tallies to 250 basis points.
“The rate hike of 25 bps today will make Loan EMIs expensive by approximately 2-4 per cent. Borrowers will either have to shell out extra money to repay their loans or will have to extend the tenure," state V Swaminathan, Executive Chairman, Apnapaisa.com as quoted by Business Today.
The banks increase the rate of interest charge in proportion to the increase in repo rate to maintain their profitability.
This increase translates into two possible outcomes, either the bank will increase the monthly EMI amount on outstanding loans or extend the tenure of the loan without increasing the monthly EMI amount.
If you or your family members have any outstanding loans like a home loan, car loan, credit card or personal financial loan, check with your bank to ascertain the additional amount you have to set aside for the loan.
Consecutive increases in repo rates amounting to 250 basis points will impact the amount of EMI repayments. Ensure that you are making necessary changes to your budget to accommodate the additional increase in payments.
What is the repo rate?
The repo rate is the rate at which the central bank, in India’s case RBI lends money to all other banks in the country.
RBI uses the repo rate as a monetary tool to regulate inflation.
When inflation is peaking, the RBI increases the repo rate to decrease spending as loans become more expensive and people avoid borrowing money due to the high-interest rates. This in turn reduces spending in the market and will result in goods becoming cheaper due to the lower demand reducing the rate of inflation.
What can you do to tackle the rate increase?
The first step would be to ascertain the increase in the amounts you have to pay so that you are aware of the revised amount in the EMI.
You have to adjust your monthly budget to accommodate the newer increased amounts.
If the bank is charging a lower amount for new loans with terms similar to your loan, get your loan refinanced to avail the benefit of new rates. In case your lender refuses to do so and you have a good credit score, you could consider changing your lender.
If you can pre-pay your loan without disturbing your long-term savings, pre-paying the loan before the completion of tenure will reduce the interest amounts you have to pay.
Ignorance is bliss until its financial ignorance which often becomes very expensive to individuals. Staying aware of your financial situation is a step closer to improving it.
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