For the first time in four and half years, the Reserve Bank of India has raised the repo rate by 0.25% at the back of rising inflation and high oil prices. This has occurred for the first time since the Narendra Modi government came to power in the year 2014 AD. Market analysts and financial experts had anticipated a status quo on interest rates in the RBI’s bi-monthly monetary meet. With the announcement, the repo rate is now 6.25%. Reserve repo rate has risen up to 6% now.
Personal loan, car loan and house loan, etc will be more costly now. Many banks and housing finance companies have already raised their marginal cost of funds-based lending rates well ahead of the RBI policy. This happens to be the rate in which the central bank lends money to the banks. This hike has a direct impact on borrowers because banks will begin raising interest rates on loans.
What is a Repo Rate?
Reserve repo rate is the rate at which banks lend money to the RBI. When banks are in need of money, they approach the RBI. The rate transacted at is the Repo rate.
What Should Borrowers Do Now?
Home loan rates have been raised by banks but the existing home loan borrowers- the ones on Marginal Cost of Funds(Mutual Funds) Based Lending Rates-shall proceed to repay loans with the old interest rates till their next loan reset dates.
Naveen Kukreja explains “Once they cross their reset date, they have to compare the new lending rate with those offered by other banks and housing finance companies and calculate the potential savings, if any, on exercising the home loan balance transfer option. If the savings are substantial, then they should approach their loan sanctioning branch to negotiate a lower rate or opt for a home loan balance transfer, if the branch refuses to renegotiate the interest rate”.
Impact on Borrowers
Since the RBI has raised Repo rates, other banks also will raise their marginal cost based lending rates and many have already done so over the past week.
As per the mandate of the central bank, all loans including home loans dispensed on or after April 1st, 2016 ought to be linked to Marginal Cost of fund based Lending Rate (MLCR). Banks have the choice to determine whether or not to charge additional markup over and above MLCR. However, the lending rate shall not go below MLCR.
What Should Borrowers Like Shashank Do?
If he is a new home loan borrower, he has to compare largely the interest rates from various lenders prior to taking a final call. This is because home loan rates vary across many banks and financial lenders.
If he is an existing borrower linked to MCLR, the Equated Monthly Installment (EMI) burden will rise due to the hike in rates. This increase will be felt by you when the reset date of your loan arrives. On the reset date, your future EMI’s will be calculated based on the MCLR for that date.
If the home loan is linked yet to the base rate, you have to switch to MLCR based loan. MLCR scores over the base rate and Benchmark Prime Lending Rate (BPLR) systems because of its transparency and transmission of policy prices.
However, if Shashank is an individual waiting on the sidelines of a rate cut, he must not delay any longer as the banks have been rising their MLCR’s specifying the hike in fund rates before the RBI raised prices of the policy. These prices could rise in the future.
If you want to lessen your EMI, apply for a loan under Pradhan Mantri Awas Yojana, which is a credit linked interest subsidy given as per your income level. The time limit to get this benefit under this scheme is March 31st, 2019.
There have been a number of financial institutions in their research reports who had already spoken about RBI doing this. Hence, this isn’t sudden.
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