RBI Repo Rate Hike: What Is Repo Rate And How It Affects Home Loan EMIs

RBI Repo Rate Hike: This is the third consecutive rate hike after a 40 basis points in May and 50 basis points increase in June.

By Anushka Vats
Updated: Fri, 05 Aug 2022 12:40 PM IST
Minute Read
RBI Repo Rate Hike: What Is Repo Rate And How It Affects Home Loan EMIs
RBI Repo Rate Hike: Reuters Image

The monetary policy committee of the Reserve Bank of India (RBI) on Friday hiked the repo rate by 50 basis points to 5.40 per cent in order to contain the persistently high inflation.

The three-day monetary policy committee meeting commenced on Wednesday. Meanwhile, a rise in the interest will typically suppress demand in the economy, contributing to a decline in inflation.

This is the third consecutive rate hike after a 40 basis points in May and 50 basis points increase in June. In all, the RBI has raised benchmark rate by 1.40 per cent since May this year.

What Is Repo Rate:

Repo rate is the rate of interest at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. The Repo rate is used by monetary authorities to control inflation.

In case of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

How Will It Affect Home Loan EMI?

An equated monthly instalment is a fixed amount payable to a moneylender by a borrower for a specified period at a particular date of every month. EMI consists of a principal sum and interest amount to be charged by a borrower to repay for a specified period of years to pay back the loan in complete.

With the latest spike in repo rate, lenders including banks and housing finance companies may raise their lending rates in response, which would result in an uptick in your EMIs.

How To Reduce Higher Loan EMIs?

In order to reduce higher loan EMIs, existing borrowers can use the balance transfer option to reduce their EMIs. This service allows customers to transfer their total outstanding loan balance to another bank that gives them lower interest rates on the outstanding loan amount.

Meanwhile, new borrowers can opt for a loan with a higher down payment to reduce their EMI burden, or a loan with a longer repayment term to decrease the amount owed in monthly installments.

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