Home / Money / Personal Finance /  RBI monetary policy: Rate hike is likely to push home loan rates higher, EMIs may get costlier

All eyes are now set on RBI's bi-monthly monetary policy on Friday. RBI is expected to continue raising the repo rate to tame CPI inflation which stays above its comfort zone for six consecutive months. With a rate hike case on the tables again, its impact will also be seen in borrowers' term loans including home loans. Generally, when RBI hikes the repo rate it increases the cost of funds for lenders like banks. A rate hike means banks will have to pay more for the money they borrow from RBI. As a result, banks pass on the cost to borrowers by increasing their own interest rates on loans which makes equated monthly instalments (EMIs) costlier. Both new and existing borrowers are likely to witness an increase in their home loan interest rates.

In the past two policies, RBI has hiked the repo rate by 90 basis points. The first hike was to the tune of 40 basis points in May and later of 50 basis points in June.

The policy repo rate currently stands at 4.90%. Also, the standing deposit facility (SDF) rate stands at 4.65%, and the marginal standing facility (MSF) rate and the Bank Rate at 5.15%.

At present, India's CPI inflation is at 7.01% in June 2022 which slightly moderated from 7.01% in May. This year, in April, Inflation peaked at 7.79%. With that, inflation has stayed above RBI's upper limit of 6% for the sixth consecutive month. 

Many banks have raised their home loan rates from May to July this year. The majority of the lenders have linked their lending rates to repo rate.

RBI's latest data shows that the weighted average lending rate (WALR) on fresh rupee loans of SCBs increased by 8 basis points (bps) from 7.86% in May 2022 to 7.94% in June 2022. Further, 1-Year median Marginal Cost of Fund-based Lending Rate (MCLR) of SCBs increased from 7.40% in June 2022 to 7.55% in July 2022. Also, WALR on outstanding rupee loans of SCBs increased by 14 bps to 8.93% in June 2022.

How much rate hike can be expected in August policy? 

Sumit Chanda, Founder, and CEO, JARVIS Invest said, "While there have been some indications of the inflation moderating, with the Brent still above the $100 mark and a falling Rupee, we can expect the RBI to hike the Repo Rate by about 50 bps. However, what has to be noted is their tone which has mellowed down over the past couple of weeks where they don't want to compromise on growth to fight inflation. They would rather have the fiscal policies address the pressure on the prices than act to reduce liquidity in the system to suppress demand."

Whereas Shivam Bajaj - Founder & CEO at Avener Capital said, "Two critical factors would determine MPC's stand on rates in this meeting, whether Inflation continues to remain beyond RBI's comfort zone and GST collections, as well as PMI, is looking up even after successive rates hikes by RBI in the initial part of this year which would give it the confidence to continue its hawkish stand. This might align market expectations towards rate hike by around 30 bps."

Also, Suvodeep Rakshit, Senior economist at Kotak Institutional Equities said, "We believe that the RBI will hike repo rate by 50 bps to acknowledge (1) elevated but gradually falling inflation, (2) being in sync with global monetary policy while reacting to the domestic macro situation, (3) addressing external sector pressures by managing interest rate differentials, and (4) continuing to frontload the rate hikes. Arguably, the quantum of the hike is finely balanced within the 35-50 bps range. We continue to pencil in repo rate at 5.75% by end-FY2023."

Further, Rakshit added that the RBI’s deliberations will likely be centered around (1) the global monetary policy cycle and outlook for global growth, (2) external sector imbalances manifesting in pressures on the INR, (3) recent easing of global commodity prices, and (4) domestic inflation and growth trajectory.

"We note that since the June policy, the Fed has surprised on the upside with 150 bps hikes over the June and July policies with risks of narrowing interest rate differentials. We believe that while domestic inflation concerns may be slightly lower, external sector concerns warrant caution," Rakshit said.

Will home loan rates be affected by the hike in policy repo rate?

Ravi Subramanian, MD & CEO, Shriram Housing Finance said, "The MPC in its August policy announcement is likely to hike rates upward of 35bps, however, I don’t anticipate a jumbo-sized hike like other major central banks namely US Fed or ECB. This is because in the absence of any fresh shocks, economic conditions in India have marginally improved and therefore an aggressive rate path is not warranted. In fact, any supersized hike in repo rate will go against the palpable recovery in productive sectors like housing and construction which have the highest forward and backward linkages in the economy. The inflation trajectory is above the RBI’s comfort level of 4% (+/-2%)."

"Therefore, the MPC will opt for interest rate increases in smaller doses till the general price level falls within the RBI’s comfort band. Such guidance will temper the future rate hike concerns and soothe the nerves of the market. Also, I expect MPC to shift its policy stance from 'calibrated tightening’ to `neutral’ in its forthcoming resolution," Subramanian added.

According to Ashish Khandelia – Founder at Certus Capital and Earnnest.me, RBI has already hinted at the withdrawal of its accommodative policy stance and increased the repo rate by 90bps since May 4, 2022. These hikes have caused home loan rates to move closer to ~7.50%. Another hike that’s expected tomorrow will increase the home loan rates, with final year-end rates likely closer to 8% +/-. The continued residential momentum in Q1 has demonstrated that current home loan rates are still in the acceptable zone and we can expect this momentum to continue even if rates touch ~8%.

Here are some of the home loan rates offered by major banks:

SBI home loan interest rates:

SBI levies interest rates on home loans based on borrowers' credit scores. For regular home loans, SBI offers a 7.55% rate on credit scores greater or equal to 800, while the rate is 7.65% on scores between 750-799. As for credit scores 700-749, the interest rate is 7.75%, and the rate is 7.85% on scores between 650-699.

The interest rate is 8.05% on credit scores of 550-649. Also, the bank offers a 7.75% rate on NTC/NO CIBIL score/-1.

The mean rate of interest for home loans is 7.37%.

The interest rates are floating in nature and linked to the repo rate.

HDFC Bank home loan interest rates:

The largest private lender's retail prime lending rate (RPLR) is currently at 16.05%.

For home loans amounting to 30 lakh, the bank offers a 6.75-7.25% interest rate to salaried women and 6.80% to 7.30% to others.

On a home loan between 30.01 lakh to 75 lakh, the rate is 7-7.50% for salaried women and 7.05-7.55% for others. While the rate is 7.10-7.60% for salaried women and 7.15-7.65% for others on home loans above 75 lakh.

These interest rates are similar for self-employed borrowers.

ICICI Bank home loan interest rate.

To salaried borrowers, ICICI Bank offers interest rates between 7.60-8.05% on home loans up to 35 lakh, while the rate is 7.60-8.20% on loans above 35 lakh to 75 lakh; and the rate is 7.60-8.30% on loans above 75 lakh.

RR is the lending rate linked to the repo rate.

Meanwhile, for self-employed borrowers, the private banker offers a 7.70-8.20% rate on home loans up to 35 lakh. The interest rate is between 7.70-8.35% on home loans ranging above 35 lakh to 75 lakh, and the rate is 7.70-8.45% on loans above 75 lakh.

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