On Wednesday, the Reserve Bank of India (RBI) increased the repo rate by 25 basis points, bringing it to 5.5% and marking its first rate increase in over three years, since February 2023. The six-member Monetary Policy Committee (MPC) voted unanimously for the hike following its October 5-7 meetings. Additionally, the central bank shifted its policy stance from ‘neutral’ to ‘calibrated tightening’, indicating that additional rate hikes could occur if inflation dangers continue. This decision arrives as economic growth remains robust alongside intensifying price pressures.
Inflation Prompts RBI to Tighten Policy
In August, retail inflation rose to 4.82%, staying above the RBI’s 4% medium-term goal for the third straight month. Growing concerns about the inflation outlook stem from weather-related threats, higher food inflation, and elevated crude oil prices.
Consequently, the RBI increased its inflation projection for FY27 to 5.2%, up from the previous 5%. Governor Sanjay Malhotra noted that price pressures are broadening and inflation expectations are climbing.
Despite these challenges, the central bank maintained an optimistic outlook on economic growth, upgrading its FY27 GDP growth forecast to 7.1% from 6.7%. India’s economic output expanded by 7.8% in the April-June quarter, beating the RBI’s initial 7% projection.
Home Loan Borrowers Face Higher EMIs
Borrowing expenses will likely climb for customers holding floating-rate loans tied to external benchmarks due to the repo rate hike. Depending on their specific reset cycles, banks are expected to pass along the 25-basis-point increase through higher interest rates.
For instance, on a Rs. 50 lakh home loan spanning a 20-year term, a 25-basis-point bump could elevate monthly EMIs by approximately Rs. 780, provided the rate hike is fully transferred and the loan duration stays the same. Alternatively, lenders might choose to lengthen loan tenures to keep immediate EMI surges manageable.
Meanwhile, fixed-rate borrowers will experience no immediate changes from the central bank’s announcement. Even so, lenders adjusting their pricing will likely make new loans and refinancing options costlier.
Also Read: Rupee Falls Despite RBI Action: Why Investors are Watching RBI’s Dollar Reserves?
