RBI Repo Rate: Loan may become expensive! Repo rate expected to increase by 1%, big claim in SBI Caps report

After the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) recently increased the interest rates by 25 basis points (0.25%) to 5.50%, now another worrying report has come out for the common borrowers and the real estate market. ‘SBI Caps’, the research arm of the country’s largest financial group, has claimed in its latest comprehensive research report that the central bank will reduce the policy repo rate to control inflation in the coming quarters. 75 to 100 basis points (0.75% to 1.00%) An additional increase of up to Rs. If this estimate turns into reality, the repo rate will jump to the level of 6.25% or 6.50% from the current 5.50%. This will have a direct and immediate impact on the monthly installment (EMI) and loan tenure of home loan, car loan, personal loan and MSME loans, due to which the household budget of common families may become very tight after the festive season.

According to SBI Caps macro-economic report, despite strong GDP growth in the Indian economy (estimated at 7.1%), inflation risks at the global and domestic level have suddenly turned serious:

• Crude oil surge and geopolitical tensions: Due to the increasing military conflict in West Asia, the international benchmark Brent crude oil has crossed $100 per barrel. India imports more than 85% of its crude oil needs, which poses a risk of sharp increase in transportation costs and input costs.

• Food Inflation and Seasonal Uncertainty: Due to uneven rainfall at the end of monsoon, pressure is being seen on the prepared crops of the upcoming Rabi season and Kharif. SBI Research estimates that headline CPI inflation could reach 6.8% by November, well above the Reserve Bank’s upper tolerance band of 6%.

• Strictness of global central banks: The Bank of Japan and several other Asian central banks have adopted monetary tightening stances to deal with inflationary pressures. The rupee is also under pressure due to decreasing difference between Indian and American interest rates.

• Change in stance: In the recent policy review, RBI has changed its stance from ‘Neutral’ to ‘Calibrated Tightening’, which clearly indicates that for now the phase of cutting interest rates is over and increasing the rates is the main option.

Almost all floating-rate retail and home loans issued after October 2019 in India are essentially linked to an external benchmark lending rate i.e. EBLR / RLLR (Repo Linked Lending Rate) Are connected to. This simply means that as soon as the Reserve Bank increases the repo rate by 1%, banks will add full 100 basis points (1%) to the interest rates of existing customers without any delay.

If a customer has taken a home loan for a tenure of 20 years and the interest rate increases by 1%, the mathematical effect will look like this:

Instead of increasing the EMI immediately, most banks extend the loan tenure by 3 to 5 years, due to which the borrower remains paying only interest till near the retirement age.

A sharp increase in rates by even 1% could have the biggest adverse impact on the real estate sector, especially the ‘affordable and mid-income housing’ segment with budgets between ₹40 lakh to ₹80 lakh. Property consultants believe that strong demand for home loans in the last two years had driven the real estate boom, but if interest rates cross the 9.5% level, middle-class first-time homebuyer families may postpone their decision. Similarly, the pace of festive sales of automobile companies is expected to slow down due to higher cost of commercial vehicles and personal car loans.

Following the SBI Caps report, financial advisors have given three clear suggestions to existing and new borrowers to manage their liabilities:

1. Partial Pre-payment: If you have Diwali bonus, maturity funds or additional savings available, deposit 5% to 10% of the principal in lump sum. With this, the effect of increased 1% interest can be completely neutralized.

2. Opt for EMI increment, not tenure: If the bank is increasing your loan tenure from 20 years to 25 years, opt for increasing the monthly EMI instead of the tenure by giving a written request to the bank to avoid the complex of total interest.

3. Explore balance transfer options: Compare EBLR spreads of different competing banks based on your existing credit score (CIBIL 750+). If any other bank is offering loan at a spread lower than 0.30% to 0.50%, then loan takeover can be considered.