Several lenders have lately raised their borrowing interest rates in response to the Reserve Bank of India’s (RBI) rise in the repo rate – the price at which the central bank loans money to commercial banks. The RBI has raised the repo rate by 250 basis points to 6.50 percent since May 2022.
The first increase was 40 basis points in May, followed by 50 basis points in June. It hiked the repo rate by 50 basis points again in August and once more in September. With another 35 basis point increase in December and another 25 basis point increase in February, the total increase is 250 basis points i.e. Repo rate has increased from 4% to 6.5% in the last 11 months.
Following the Reserve Bank of India’s (RBI) recent increase in repo rates, a few banks have altered their borrowing costs for home mortgages and fixed deposits. The RBI’s Monetary Policy Committee raised the repo rate by 25 basis points to 6.5 percent on Wednesday (February 8). The repo rate is the interest rate charged by the RBI when financial institutions borrow money from it.
The Central Bank of India raised its interest rate on Friday, effective February 10. The interest rate on a home loan has been hiked from 8.35-9.10% to 8.60-9.35%. Deposit interest rates, on the other hand, remain steady, except for a 0.25 percent increase for 5-year savings. A one-year deposit earns 7.75 percent interest, while three-year and five-year deposits receive 7.50 percent and 7.25 percent, correspondingly.
When the repo rate rises, what happens to your EMIs?
When the repo rates increase, commercial Banks find it more costly to borrow from the central bank, and as a result, they frequently pass on the extra cost to their consumers in the shape of higher loan interest rates. It means that borrower defaults may have to pay higher interest, perhaps increasing their monthly mortgage payments.
This can have an impact on their financial status, particularly if they have many loans or a low salary. However, it should be emphasized that an increase in the repo rate is usually an indication of tighter monetary policy aimed at reducing inflation, which can also have a positive long-term effect on the economy.
Effect on Real Estate:
With repo rates currently at 6.5%, there may be some ramifications on housing demand as home loan interest rates rise. After five straight rate hikes in the previous year, rates had already crept up. This will increase the financial strain on homebuyers because, in addition to house loan interest rates, property prices have risen in the last two to three months.
Given that interest rates may surpass the 9.5% threshold with today’s hike, we may see some impact on overall sales in the more cost-conscious inexpensive, and lower mid-range home categories. The affordable market is already struggling, and increasing the cost of purchase does not help.
Monetary policy has numerous effects on real estate demand. When the central bank rises interest rates, borrowing costs for purchasing real estate rise, potentially reducing housing demand. When interest rates remain low, borrowing costs fall, and demand for real estate may rise. Furthermore, an expansionary monetary policy that expands the supply of money can lead to higher consumer expenditure and borrowing, thereby increasing demand for real estate.
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