RBI repo rate hike: Home loan and vehicle loan EMIs are projected to rise, and so is the Acche Din for FD investors

The Reserve Bank of India (RBI) upped the benchmark lending rate or repo rate by 40 basis points (bps) to 4.40 percent on Wednesday, the first increase since August 2018. This was also the first time the Monetary Policy Committee (MPC) increased the repo rate on an unplanned basis.

The move was made to keep inflation under control, which has been persistently over the target of 6% for the previous three months. The RBI’s action, however, would have an impact on people who have borrowed house loans and vehicle loans.

Meanwhile, the MPC, led by RBI Governor Shaktikanta Das, increased the number of deposits required by banks to keep a cash reserve by 50 basis points to 4.5 percent in order to extract Rs 87,000 crore of liquidity from the banking sector. The CRR increase will take effect on May 21.

EMIS FOR HOME LOANS AND CAR LOANS

When the RBI lowers the Repo Rate, commercial banks will have a lower cost of borrowing. As a result, when the repo rate falls, banks often offer lower interest rates on consumer loans.

However, now that the RBI has raised the repo rate, banks are expected to raise interest rates on house loans, vehicle loans, and other types of loans. If banks raise interest rates, borrowers’ equated monthly installment (EMIs) would rise as well.

RATE OF INTEREST ON FD

The RBI’s decision to raise the repo rate may bode well for depositors who keep their money in savings accounts and fixed deposits (FDs). Banks are more inclined to provide higher interest rates on FDs.