RBI rate hike to burn bigger hole in aam aadmi's pocket: How much your EMI will increase - calculation

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RBI Rate Hike News: The Reserve Bank of India (RBI) on Wednesday hiked the repo rate by 50 basis points to 4.90 per cent to bolster the fight against inflation. The decision also paves the way for banks, housing finance companies and lending institutions to hike the interest rate on all kinds of loans. When banks and lending institutions will hike interest rates correspondingly, eventually existing and new borrowers will have to dole out higher EMIs for their loans.

Today’s hike comes within 36 days of the last repo rate hike of 40 bps in an off-cycle meeting of the six-member rate setting panel that marked a change in RBI’s track by shifting focus on prioritising inflation over growth. RBI Governor in his address today said that the war in Ukraine has led to the globalisation of inflation and that "our steps will be calibrated, focussed on bringing down inflation to target level". 

With the latest increase, the benchmark lending rate has now hit the two-year high of 4.90 per cent. Banks and lending institutions have already hiked interest rates on all kinds of loans after the RBI on May 4 increased the repo rate, the first such hike since August 2018. After today's decision, the stage is set for lenders to follow suit as the cost of funds is bound to rise.

Manoj Dalmia, founder and director, Proficient Equities, said that retail customers will face direct impact as the cost of lending for banks will go up.

"The rate hike leaves no option for banks but to pass on the burden to the customers," Suren Goyal, Partner, RPS Group, said.

Let’s understand how the rate hike will impact your EMIs.

HOME LOAN

If you have borrowed a home loan of Rs 25 lakh at 7.05% per annum for a tenure of 20 years and the interest is hiked to 7.55%, your EMI will go up approximately by Rs 758 from Rs 19,458 to Rs 20,216. The total interest amount payable would be Rs 23,51,918 against Rs 21,69,819. For Rs 50 lakh, the EMI will increase by Rs 1,518 from Rs 38,915 to Rs 40,433 and the total interest payable would be Rs 47,03,840.

CAR & BIKE LOAN

Likewise, if the interest rate is increased from 9% to 10% on an auto loan of Rs 7.50 lakh with a tenure of 7 years, the EMI will become costlier by Rs 400. 

PERSONAL LOAN 

Similarly, for a person who borrowed a personal loan of Rs 5 lakh at 13% per annum for a tenure of 5 years, the EMI, in case the interest rate is increased to 15%, would go up by Rs 518 from Rs 11,377 to Rs 11,895.

What Next? 

To curb inflation, the regulatory bodies are required to control liquidity circulation in the economy. For a few months, the inflation rate has been above 6% which is beyond the RBI’s comfort zone. If not controlled, the inflationary pressure could destabilise the growth. The two quick hikes show that the central bank is worried about the rising prices. The government too has resorted to the non-conventional way of curbing inflation by cutting taxes on fuel and limiting exports. But signs of inflation subsiding are yet not visible. 

"Given the current inflation dynamics in India and globally, the RBI looks set to continue with frontloading more hikes potentially in August and October MPC meetings, before likely shifting to a lower gear for bulk of H2 FY23. The central bank clearly stays focused on long-term price and financial stability and sustainability of growth,” Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank, said.

The government has tasked the central bank to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.

READ MORE: How RBI rate hike will tame inflation? Explained