Loan EMIs to rise due to RBI repo rate hike

Fixed deposits may become attractive

New Delhi: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday decided to increase the repo rate by 40 basis points. The hike will lead to an increase in loan EMIs.

The central bank increased the repo rate from 4 percent to 4.40 percent. Last time, the repo rate was changed in May 2020 when the RBI decided to cut the rate. Since then, the rate was never changed.

Apart from the repo rate, the committee hiked the Cash Reserve Ratio (CRR) by 50 basis points to 4.5 percent.

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How repo rate hike will impact Loan EMIs?

The loan EMIs is calculated based on the principal amount, time duration, and the interest rate. As the interest rate is set to rise following the hike in repo rate, the loan EMIs will increase.

Though the interest rate is bound to rise, it will not happen immediately.

However, the EMIs of the past loans availed at the fixed rates will not increase.

How repo rate hike will benefit depositors?

The hike in repo rate is bad news for the borrowers but it is a good opportunity for the depositors as they will get better returns due to the rise in fixed deposit rates.

It is likely that the short-term deposit rate will rise first. Later, medium and long-term deposit rates will increase.

What is repo rate?

The repo rate which is also known as the policy rate is the rate at which RBI lends short-term funds to banks.

The central bank increases the rate whenever there is a rise in inflation in the market. It decreases the rate when its aim is to revive the economy and control deflation.

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