The Reserve Bank of India (RBI) has decided to keep the repo rate, the key policy rate, unchanged at 6.5% for the sixth consecutive time in its latest monetary policy review announced on February 8, 2024. This means that the interest rates on home loans, which are linked to the repo rate, may not change in the near future. However, home loan borrowers should be aware of the factors that affect their EMIs and the benefits of switching to a lower interest rate.
What is repo rate and how does it affect home loan rates?
Repo rate is the rate at which the RBI lends money to commercial banks to meet their short-term funding needs. When the RBI changes the repo rate, it affects the cost of borrowing for banks, which in turn affects the interest rates they charge on various loans, including home loans. A higher repo rate makes borrowing more expensive for banks, and they pass on the increased cost to the borrowers by raising the interest rates on loans. Similarly, a lower repo rate makes borrowing cheaper for banks, and they may reduce the interest rates on loans to attract more customers.
The RBI uses the repo rate as a tool to control inflation and maintain economic stability. When inflation is high, the RBI may increase the repo rate to curb excess money supply and demand in the economy. When inflation is low, the RBI may reduce the repo rate to stimulate growth and consumption in the economy.
Why has the RBI kept the repo rate unchanged?
The RBI has kept the repo rate unchanged at 6.5% since February 8, 2023, as it expects the inflation to remain within its target range of 2-6% in the medium term. The RBI has also maintained its monetary policy stance as ‘withdrawal of accommodation’, which means that it is not in favour of easing the monetary policy further. The RBI has cited the following reasons for its decision:
- The global economic outlook remains uncertain due to the Covid-19 pandemic and its variants, the geopolitical tensions, and the volatility in the financial markets.
-The domestic economic recovery is uneven and dependent on the progress of the vaccination drive, the containment of the virus, and the policy support from the government
.- The supply-side pressures on inflation, such as the high commodity prices, the rising input costs, and the logistics bottlenecks, are likely to persist in the near term.
- The demand-side pressures on inflation, such as the pent-up consumer spending, the festive season demand, and the wage revisions, are likely to moderate in the coming months.
How does the repo rate decision impact the existing and new home loan borrowers?
The repo rate decision has a direct impact on the existing and new home loan borrowers who have opted for the external benchmark-linked lending rate (EBLR) regime, which was introduced by the RBI in October 2019. Under this regime, banks have to link their home loan interest rates to an external benchmark, such as the repo rate, the treasury bill rate, or the market-determined rate. The banks have to reset the interest rates at least once in three months, based on the changes in the external benchmark.
Since the repo rate has remained unchanged at 6.5% for a year, the EBLR-linked home loan interest rates have also remained stable during this period. The average EBLR-linked home loan interest rate offered by the leading banks is around 7.5% as of February 2024. This means that the existing and new home loan borrowers who have chosen the EBLR regime have not seen any change in their EMIs in the last one year.
However, the repo rate decision has no impact on the existing and new home loan borrowers who have opted for the marginal cost of funds-based lending rate (MCLR) regime, which was introduced by the RBI in April 2016. Under this regime, banks have to link their home loan interest rates to their own cost of funds, which may vary from bank to bank and from time to time. The banks have to reset the interest rates at least once in a year, based on the changes in their cost of funds.
Since the MCLR regime is not directly linked to the repo rate, the MCLR-linked home loan interest rates may not change in sync with the repo rate changes. The average MCLR-linked home loan interest rate offered by the leading banks is around 8.5% as of February 2024. This means that the existing and new home loan borrowers who have chosen the MCLR regime may be paying higher interest rates and EMIs than the EBLR regime borrowers.
Should you switch to a lower interest rate?
If you are an existing home loan borrower who is paying a higher interest rate than the prevailing market rate, you may consider switching to a lower interest rate to save on your interest cost and reduce your EMI burden. You can switch to a lower interest rate in two ways:
- You can switch from the MCLR regime to the EBLR regime within the same bank, if your bank offers this option. This may involve paying a one-time conversion fee to the bank, which may vary from 0.1% to 0.5% of the outstanding loan amount. You should compare the conversion fee with the interest savings and the EMI reduction before making the switch.
- You can switch from one bank to another bank that offers a lower interest rate, irrespective of the regime. This may involve paying a foreclosure charge to the existing bank and a processing fee to the new bank, which may vary from bank to bank. You should compare the switching costs with the interest savings and the EMI reduction before making the switch.
You can use online calculators or consult a financial advisor to compare the different interest rates and regimes and find the best option for you. You should also check your credit score and repayment history before applying for a switch, as they may affect your eligibility and the interest rate offered by the new bank.
Conclusion
The RBI has kept the repo rate unchanged at 6.5% for the sixth consecutive time in its latest monetary policy review, which means that the home loan interest rates may remain steady in the near future. However, home loan borrowers should be aware of the factors that affect their EMIs and the benefits of switching to a lower interest rate. By choosing the right interest rate regime and the right lender, they can save on their interest cost and reduce their EMI burden.
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