The Monetary Policy Committee, led by RBI Governor Shaktikanta Das has decided to keep the repo rate unchanged at 6.5% on Friday (June 7, 2024).

The MPC began its three-day meeting on Wednesday (June 5, 2024), shortly after the Lok Sabha election results. The six-member committee is responsible for setting India’s benchmark interest rate, the repo rate.

During a press conference, RBI Governor Shaktikanta Das revised the GDP growth projection for FY 25 to 7.2%, up from the previously expected 7%. The government has assigned the RBI to maintain CPI inflation at 4%, with a margin of 2% on either side.

With the RBI maintaining the repo rate, all lending rates linked to this benchmark will remain unchanged. This means borrowers can now relax as their equated monthly installments (EMIs) will not go up.

Let’s see how a change in the repo rate affects loans:

Impact on Interest Rates:

Repo Rate Cut: When the RBI lowers the repo rate, commercial banks can borrow money more cheaply from the central bank.

This often leads to reduced interest rates on loans, including home loans, making homeownership more affordable as lower interest rates mean lower EMIs (Equal Monthly Installments).

Repo Rate Hike: When the RBI increases the repo rate, borrowing costs for banks go up. To maintain profitability, banks usually increase the interest rates on all of their loans including home loans.

This results in higher EMIs for existing borrowers with floating-rate loans and higher interest rates for new home loan applicants.

Impact on Existing Borrowers:

Floating Rate Loans: Borrowers with floating-rate home loans experience immediate effects from repo rate changes. Their interest rates are directly linked to the repo rate, so any change is reflected in their EMIs.

Also Read: Why has RBI fined ICICI Bank and YES Bank?

Fixed Rate Loans: Changes in the repo rate do not immediately impact borrowers with fixed-rate home loans. Their interest rate remains the same for a specific period (usually 1-5 years). However, once this fixed-rate term expires, the interest rate will reset based on the prevailing repo rate at that time.

The RBI aims to control inflation and keep it within a target range, but currently, inflation, especially for food, is above the 4% target.

While cutting rates could boost growth, the RBI is focusing on controlling inflation, believing that maintaining the current rate will help manage it while still supporting some economic growth.

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