Reserve Bank of India’s Monetary Policy Committee (RBI-MPC) on Wednesday raised the repo rate by 25 basis points to 5.50 per cent from 5.25 per cent. The hike was expected amid mounting inflationary pressures. However, the development will lead to an increase in lending rates for home loans, vehicle loans, and existing EMIs. Industry experts say that this may hit the housing sector in the short term; however, the long-term perspective may remain resilient.
Additionally, a higher repo rate will weigh on funding costs forthe NBFC and formal banking sector.
This was the first hike in the repo rate since February 2023, when the central bank escalated theshort-termm lending rates by 0.25 per cent to 6.50 per cent. Since then, the rates have stood still, before initiating multiple rate cuts in 2025.
RBI Repo Rate Hiked: Impact On Home Loan And EMIs
A hike in the repo rate reflects RBI’s move to contain inflation while maintaining macroeconomic stability. The development will certainly impact homebuyers' sentiment as the borrowing cost will go up.
“While this move is likely to result in a marginal increase in home loan borrowing costs, we do not expect it to significantly alter homebuyer sentiment or long-term housing demand. For most borrowers, the impact on EMIs will remain manageable, particularly when viewed against the long tenure of a home loan,” said Atul Monga, CEO & Co-Founder, BASIC Home Loan.
Also Read: RBI MPC Raises Repo Rate By 25 Bps To 5.50% In First Hike Since February 2023
Repo Rate Hiked: Home Loan EMI Calculator
According to Monga, on a standard Rs 50 lakh home loan with a 30-year tenure, a 25 bps rate increase lifts the monthly EMI by Rs 852 at a PSU bank, from Rs 34,109 to Rs 34,961, and by Rs 867 at a private bank, from Rs 35,821 to Rs 36,688.
“Over the full 30-year tenure, this translates into an additional interest outgo of approximately Rs 3.07 lakh for a PSU bank and ₹3.12 lakh for a private bank, assuming the loan runs for the full tenure,” the BASIC Home Loan CEO noted.
What Should Home Borrowers Do?
With home loan rates going up, borrowers should shift their focus to disciplined debt management rather than reacting to short-term rate movements. They should adopt an approach to increase the EMI amount instead of increasing tenure for loan to absorb the rate hike.
According to the expert, allocating annual savings or bonuses toward prepaying just one extra EMI each year can help offset the impact of the 25 bps hike.
Impact On NBFC And Banking
The business of Banks and Non-Banking Financial Institutions (NBFCs) might take a hit as the repo rate hike will drain some credit liquidity, hitting high-potential vehicle loan and Home Loan verticals.
“For NBFCs, higher rates will have an impact on funding costs, making disciplined pricing, a diversified funding mix and prudent underwriting even more important. At the same time, underlying credit demand remains healthy. We therefore see this as an environment for calibrated, quality-led growth, balancing opportunity with risk & profitability," said Abhimanyu Munjal, MD & CEO - Hero FinCorp.
Impact On Real Estate Market
The development’s immediate impact will be through borrowing costs for residential real estate, and it may soften demand for a while. However, market leaders say that demand would not take a significant hit.
“Luxury housing should remain relatively resilient through the festive season, as buyers in this segment are influenced by factors beyond financing costs, including location, quality, lifestyle and long-term value. While further rate hikes could affect purchase timelines at the margin, strong end-user demand should continue to support the premium housing market,” said Ashok Singh Jaunapuria, MD & CEO, SS Group.
Vimal Nadar, National Director & Head of Research, Colliers India, believes that the increase in benchmark lending rate may soften near-term demand; the sector’s strong underlying fundamentals should help cushion the impact across most asset classes in India.
“In the residential segment, a rise in borrowing costs is likely to drive homebuyers to adopt a nuanced & selective approach in their purchase decisions, particularly in price-sensitive categories. In this scenario, developers could absorb most of this financing pressure and provide comfort to homebuyers through festive discounts and innovative pricing plans to boost sales,” Nadar added.