To control rising inflation in the country, the central bank of India started hiking key lending rates in May 2022 after maintaining status quo on the rates for two years. RBI has so far raised the repo rate by 225 basis points. “Most of the banks have already passed on around 200 basis points hike to the home loan borrowers till date,” said Manish Srivastava, Executive Director, Anand Rathi Wealth Limited.
For instance, let us say an individual aged 32 years has opted for a home loan of Rs 30 lakh for a tenure of 20 years at a 6.95 per cent interest rate in April 2022. At that time his EMI was Rs 23,169. With back-to-back rate hikes by the RBI, his home loan interest rate has currently increased to 9.20 per cent. Now, he has to shell out around Rs 26,000 EMI for his current home loan outstanding. (Considering he has already paid EMIs for 11 months).
How much will RBI hike the repo rate in February Monetary Policy?
There won’t be any immediate respite to borrowers in terms of RBI increasing the repo rate this week; the question, however, is by how much they will hike the rate. Answering this, Madan Sabnavis, Chief Economist, Bank of Baroda stated, “The credit policy will be announced against the background of both the budget that was presented as well as the Economic Survey that served as the prelude to the same. The Budget has maintained a virtually unchanged borrowing programme while the Survey has pointed to the persistence of higher interest rates in the coming year. While inflation has been trending downwards there has been a tendency for core inflation to remain sticky. Inflation has come down mainly due to lower food inflation which can be volatile. Also, the decision taken this time cannot be reversed soon. Under these conditions, the RBI will pitch for another 25 bps hike in the repo rate…”
Another opinion is that the RBI may press the pause button on the rate hike on February 8. “This policy decision is likely to be a very close call between a pause and a final hike of 25 basis points,” said Aditi Nayar, chief economist at rating agency ICRA.
“We expect the RBI to pause in February policy,” State Bank of India’s Economic Research Department said in a report titled ‘Prelude to MPC Meeting on February 6-8, 2023’.
Will this be the last repo rate hike by RBI?
Even if RBI does not hit pause on the rate hike this time, this might be the last interest rate hike, believed many. Ease in inflation and the stance of central banks worldwide are likely to decide the future course of the Reserve Bank of India.
“The intensity of rate hike has been lowered and we can expect some pause in the subsequent Monetary Policy Committee outcomes. However, a complete pause or cycle reversal (rate reduction) will depend on credible evidence of inflation getting to the target 4 per cent level and also what is happening on the monetary policy front globally, as that impacts capital flows and the exchange rate environment in India too,” said Vivek Rathi- Director Research, Knight Frank India.
“While the retail inflation numbers have softened over the past few months, the core inflation figures remain sticky and elevated. However, with subsequent rate hikes and easing supply chain constraints, inflation has moderated below 6 per cent and currently stands at 5.72 per cent in December, 2022. Even the Wholesale Price Index (WPI) inflation has lowered below 5 per cent. Meanwhile, the United States Federal Reserve has moderated the pace of rate hikes as inflationary conditions eased in the country. So after February Monetary Policy, there could be a pause. The prospects of a slowdown in global economic conditions may stop further hikes as well.” mentioned Srivastava.
A pause in repo rate hikes is expected to bring some much-needed relief to home loan borrowers.
“We believe that headline inflation is range bound and growth in the economy needs to pick up, hence there would be a pause in the rate hikes for the next few quarters,” said Satish Nair, Head – Treasury and Corporate Affairs, Vastu Housing Finance.
How will RBI repo rate hike impact home loan borrowers?
Among all existing home loan borrowers, those having their loans linked to the repo rate would witness the quickest transmission of increased policy rates. As higher repo rates would eventually increase the cost of funds for all lenders, home loans rates linked to the MCLR (Marginal Cost of Funds Based Landing Rate) or other rate-setting benchmarks would increase as and when the increased repo rates start impacting the cost of funds for the lenders. Note that the existing home loan borrowers would be charged higher rates from the interest reset dates set for them by the banks. Till then, they would continue to repay their home loans as per their existing interest rates.
“In terms of transmission of the repo rate hike to the home loan and other consumer loans, we have seen a cumulative transmission of close to two-thirds or around 62 per cent as yet. However, with the tightening of systemic liquidity, the transmission will be quicker and higher than these levels as we go ahead. We think the moderation in rate hike intensity is some kind of relief for the home loan borrowers as we are close to the terminal rates in this rate hike cycle,” Rathi added.
In the case of fresh home loan borrowers going for floating rate home loans, which are all linked to an external benchmark, the transmission of the increased policy rates to fresh home loan rates would depend on the rate reset dates fixed by the banks as per their guidelines.
What will decide future repo rate pause or hike?
The rate hikes reflect not only the inflation in India but also other global macro-economic factors, including supply-chain issues, the ongoing Russia-Ukraine war, the energy crisis, and global inflation, said Adhil Shetty, CEO, of BankBazaar.com. “All these issues will determine the behaviour of central banks globally, and the RBI is keeping pace with all these changes,” he mentioned.