Interest rates

As RBI raises interest rates by 40 basis points, how much will EMIs cost borrowers? India Ratings explains

The untimely rate hike by the Reserve Bank of India’s monetary policy will make loans more expensive for borrowers, especially those with longer tenors, such as home loans and mortgages, according to India Ratings. For lenders such as banks, the 40 basis point rate hike by RBI will directly raise deposit rates, which would limit their spread benefits, the rating agency added. India Ratings said that for a 15-year loan, a rate hike of 50 basis points will increase the EMI burden by up to 2.5%, while if interest rates are increased by up to 1.5 %, EMI can increase up to 9.4% for the same term.

“While the rise in the repo rate since May 2020 would increase borrowing rates for end borrowers (existing and new), the rise in deposit rates would limit the spread benefit for lenders, especially for those who have a higher proportion of commitments at shorter end, where the effect of this rate hike would be immediate and larger,” India Ratings said in a note last week. “To cushion the impact on flows cash flow, lenders should become more flexible with term extensions,” he added.

Rising repo rates, i.e. the rate at which banks borrow from the central bank, and rising inflation (including food inflation) could impact the cash flow of borrowers, India Ratings said. According to India Ratings, overall for banks, around half of total retail loans were home loans at the end of FY 2022. According to RBI estimates, home loans grew by 7% in 2022.

Assuming the pass-through of the increase in the repo rate to the lending rate (for the end borrower) and no term extension, the increase in the EMI burden has been tabulated by India Ratings below:

Increase in EMI for the end borrower:

0.40% 0.50% 1% 1.5%
15 year loan 2.5% 3.1% 6.2% 9.4%
7 year loan 1.3% 1.6% 3.2% 4.8%
3 year loan 0.6% 0.7% 1.5% 2.2%
Source: India Assessments

Last week, India’s largest private lender, HDFC Bank, raised interest rates on home loans by 30 basis points. HDFC’s action came after ICICI Bank, Bank of Baroda and RBL Bank also hiked interest rates after the monetary policy committee announced a rate hike during a meeting. an off-cycle meeting on May 4.