The Reserve Bank of India (RBI) for the sixth time in a row hiked the repo rate by 25 basis points (bps) to 6.50 per cent on Wednesday. After this hike in the Repo rate, banks are expected to increase their interest rates on retail loans.
EMIs to be more expensive
The rise in repo rate means a hike in loan interest rate and you will have to pay more interest as the EMIs for loan repayments will be more expensive. The rise in bank interest rates directly impacts the new loan borrowers and the bank depositors.
The impact of the rise in interest rate may either be felt immediately or may take some time as it will depend on the type of loan you take and the interest rate at which you will take the loan. If the loan you have taken was set when the repo rate was much lower then you will feel the hit immediately as the cost will dramatically increase. However if you have taken a loan in the last month then the increase in interest rate may not hit you as bad.
Why has the interest rate increased?
The rise in interest rates is generally intended to control inflation and ensure that the cost of borrowing is kept under check.
Whenever there is a spike in prices, the RBI increases the interest rates for short term loans. With the hike, borrowers have less incentive to borrow from banks as the loans are more expensive.
Short-term lending rate increased
In December 2022 the central bank raised the key benchmark interest rate by 35 bps after it hiked it three times back-to-back by 50 bps. Between the June to OCtober period it was increased by 50 bps each but in December it softened to 35 bps.
Since May last year, due to global supply chain disruption after the Russia-Ukraine war, RBI increased the short-term lending rate by 225 bps to contain inflation.
Currently, the repo rate is 6.25 per cent.
