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Repo rate hiked: Why the RBI move is bad news for loan borrowers

After revision, the repo rate is now at 4.40 per cent from a record low of 4 per cent.
Repo rate is the interest charged by the central bank of a country (In case of India, it is the RBI) when commercial banks borrow from them. (Getty Images/iStockphoto (PIC FOR REPRESENTATION)
Published on May 04, 2022 10:57 PM IST

The Reserve Bank of India (RBI) on Wednesday increased the key interest by 40 basis points in a surprise move, set to hit those who were about to take home, an auto or any other loan. Announcing the hike, earlier in the day, central bank governor Shaktikanat Das said the step is part of efforts to tame the inflation that has remained stubbornly above target in recent months.

After revision, the repo rate is now at 4.40 per cent from a record low of 4 per cent. It is the first hike since August 2018. It is also the first instance of the RBI governor-headed monetary policy committee (MPC) holding an unscheduled meeting for raising interest rates.

What is Repo Rate?

Repo rate is the interest charged by the central bank of a country (In case of India, it is the RBI) when commercial banks borrow from them. Essentially it is the interest charged by the RBI when banks borrow from them - much like commercial banks charge you interest for a car loan or home loan.

How will it impact EMIs?

The hike spells bad news for those who were looking to take a home or an auto loan as banks and other financial institutions will soon start increasing interest rates.

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For existing borrowers as well, it will have a major impact as soon, the banks will start implementing the change in the interest rate according to the new repo rate, which means the monthly EMIs will also go up.

The calculation

Suppose, a borrower has taken a loan of 30 lakh for a tenure of 20 years on an interest rate of 6.8 per cent. In this condition, the borrower is paying 22,900 as EMI every month.

Now after the implementation of the new repo rate, the rate of interest is expected to be 7.2 per cent. In such a situation, the monthly EMI will be increased to 23,620. In this context, the EMI of a customer taking a loan of 30 lakh for 20 years will increase by 720.

(With agency inputs)

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