How a change in RBI’s repo rate impacts your Home Loan EMIs

The Reserve Bank of India’s (RBI) policy meetings never fail to create a buzz among home loan borrowers. In its latest meeting, the Indian central bank kept the repo rate unchanged at 6.50%. If you're someone with a home loan, you might be curious about what this means for you. Read on to understand the math behind it.

What is the repo rate and how it impacts your home loan EMIs?

The repo rate, or repurchasing option rate, is the rate at which the RBI lends money to banks. The RBI typically uses this tool to control inflation in the economy. You might be wondering how this affects your loan EMIs.

So, let us understand the whole cycle: When the economy is doing well and growing, there's a lot of money flowing around (high liquidity in the system), which can lead to a price rise – that's inflation. Thus, to control high inflation and tighten the liquidity in the system the RBI increases policy rates (repo rate, CRR, and others). As a result, banks will be discouraged to borrow at a higher rate from the RBI. Currently, a majority of bank loans are linked to the repo rate, so when the repo rate rises, the interest rates on loans also increase. For example, if you have a home loan of Rs 50 lakh at 8% per annum for 20 years and the interest rate increases to 9%, your monthly EMI payment will go up by around Rs 3,164 from Rs 41,822 to Rs 44,986.

Similarly, when the RBI reduces the repo rate, the interest rate on loans and EMI amount will decrease too. To put the whole math in simple terms: when the RBI repo rate rises, your loan EMIs will rise, and vice-versa.

What to infer from the RBI’s latest policy decision?

To combat high inflation, the RBI has been increasing the repo rate since May of last year. During this period, the central bank has raised the repo rate from 4% to the current 6.5%. This has led to rising interest rates on different types of loans. However, since April 2023, the RBI has been maintaining the status quo on the policy rate at 6.5% for the third consecutive policy. No change in the repo rate means there will be no change in your loan EMI and you will continue to pay the same EMI and interest as earlier.

For those who are paying loan EMIs, the critical factors that will shape future changes in the repo rate – and consequently shifts in home loan interest rates – are domestic inflation and global conditions. The main task of the RBI is to maintain retail inflation within the band of 2-6%. When the RBI began raising the repo rate in May 2022, retail inflation reached its peak at 7.79% due to global trends. However, the aggressive rate hikes by the RBI subsequently lowered inflation to a historical low of 4.31% in May 2023. Nevertheless, inflation has risen again to 4.81% in June on the back of higher essential food prices. Therefore, the inflation trajectory will be pivotal for any future course of monetary action.

Also Read: [Home Loan and Mortgage Loans - What's the difference?]

What borrowers should do?

Changes in interest rates are a function of various macroeconomic factors which are not in our control. So, borrowers can't do much about these interest rate changes. Nevertheless, there are certain strategies that may help you manage your home loan EMI better.

• Make frequent part payments: Making frequent part payments can expedite loan repayment and result in substantial interest savings.
• Home loan balance transfer: If you feel that your current home loan interest rate is too high, you can opt for a home loan balance transfer.
• Extend your home loan tenure: By extending the loan tenure, you can reduce the EMI amount, making it more manageable.
• Keep a high credit score: Having a good credit score enables you to discuss getting lower interest rates with lenders. Read here to know more about credit score and how to maintain a good score.
• Higher down payment: For those looking to buy a home, making a bigger initial payment decreases the main loan amount, thus decreasing the overall interest you will pay.

By following these strategies, you can ease the weight of EMI burden and improve the manageability of your home loan. Axis Bank offers an attractive home loan interest rate and longer loan tenure, along with a minimal processing fee. All these aspects combine to make a home loan well within your affordability.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision