Will your home loan EMI finally go down? RBI’s repo rate hike pause is a great sign!

The Reserve Bank of India (RBI) decided to keep the repo rate unchanged at 6.5 per cent for a second time in its bi-monthly Monetary Policy Committee (MPC) meeting. Will the borrower see a silver lining in the upcoming MPC meet and could repo rates decline? Experts say that once inflation gets curtailed, borrowers may expect a rate cut in future MPC meetings, which will happen in August, October, December, and February 2024. However, experts are yet to ascertain in which policy meeting the rates could be cut. 

Adhil Shetty, CEO of BankBazaar.com, said, “The policy repo rate at 6.5 per cent is much higher than the full year projected inflation for 2023-24 of 5 per cent, and the real policy rate continues to be positive. However, the headline inflation is still above the target though it continues to ease. The RBI is also being cautious about the average system liquidity, which is still in surplus mode and could increase as Rs 2,000 banknotes get deposited in the banks. Once inflationary pressures ease and surplus liquidity stabilises, the RBI will be in a position to cut rates again. If there are no major shake-ups, we can expect a turnaround in the second half of the year.” 

Adding to it, Parag Sharma, Whole-time Director and Chief Financial Officer, Shriram Finance, said: “We do expect repo rates decline post inflation being curtailed. This should happen over one year, which will pave the way for growth.” 

Generally, when inflation increases, the RBI increases the repo rate to deter lenders from borrowing. You must know that the repo rate is the interest rate at which the RBI lends money to the lenders such as banks. The higher the repo rate, the higher the cost of borrowing for the lender from RBI because of the upward change in the lending rates. Similarly, when the RBI lowers the repo rate, the lenders’ cost of borrowing comes down because of the downward movement of lending rates. Borrowers benefit from this downward movement in rates as lenders pass the rate cut benefit on to them. 

Jyoti Prakash Gadia, Managing Director, Resurgent India, said: “The RBI’s strategy regarding the change in repo rate in the future will depend on several factors. Foremost among them is the status of monsoons in coming months with or without the El Nino effect. Its outcome will determine the level of kharif production, which will directly impact food inflation and rural demand. The overall movement of prices and GDP trends in the next few months will determine the RBI’s action on the repo rate. RBI is committed to taming inflation and bringing it down to the acceptable range of 4 per cent. Once the economy is close to that level of inflation, we can expect RBI to change its stance and go in for a reduction in the repo rate. Looking at the current scenario and expected trends, there is a likelihood of a repo rate reduction in the third or fourth quarter of the current financial year.” 

Thus, experts say the RBI’s decision to pause rate hikes for the second time is a positive sign that interest rates may be stabilising. If inflation remains within the targeted limit, RBI Governor Shaktikanta Das cannot rule out the possibility of a rate cut by the end of this year. 

However, if you struggle to manage your EMIs, you can talk to your lender and look for other options to reduce your EMI burden. 

You can currently opt for a repayment strategy to handle a rate hike or cut. Over the last year, the repo rate climbed by 250 basis points, making loans dearer for borrowers. Today, many home loan borrowers are paying over 9 per cent on their home loans, the tenors for some of which have also gone up beyond the retirement years. 

You can reduce your debt burden by making faster prepayments. If you can prepay 5% of your loan balance yearly, you can reduce your loan tenor and interest outgo. This will allow you to save money which you can then invest. 

Besides, if you are paying a higher rate on your loan, refinance it to a lower rate to save on EMIs. Also, check the spread rate applicable to your loan. “Lenders decide the spread rate based on the borrower's credit score, income source, and loan size. This rate remains constant throughout your loan tenure. Currently, the lowest spread rate offered is 1.9 per cent,” said Shetty.