RBI repo rate hike may push up floating home loan EMIs

The Reserve Bank of India’s 25-basis-point increase in the repo rate to 5.50 per cent is likely to raise borrowing costs for millions of home loan customers with floating-rate loans.

Floating-rate home loans are linked to external benchmarks, including the RBI’s repo rate, and are generally more affordable than fixed-rate loans. As a result, changes in the policy rate can directly influence the interest rates charged to borrowers.

When the RBI raises the repo rate, banks and other lenders may pass on the higher funding cost by increasing their lending rates. For existing borrowers, this can result either in higher equated monthly instalments (EMIs) or an extension of the loan tenure, depending on how the lender adjusts the loan.

For instance, a borrower currently paying 8 per cent interest could see the rate rise to around 8.25 per cent if the entire 25-basis-point increase is passed on. The actual impact, however, will depend on the benchmark and reset mechanism applicable to the individual loan.

Borrowers have been advised to monitor their lenders’ official websites and loan statements for details of any rate revision. Banks may communicate changes in the applicable interest rate, EMI or repayment tenure following the RBI’s decision.

The rate hike came as the RBI’s Monetary Policy Committee (MPC) weighed persistent economic uncertainties, including tensions in West Asia, elevated crude oil prices and concerns over food inflation.

The RBI had last raised the repo rate by 25 basis points in February 2023. It subsequently kept the rate unchanged through 2023-24 before beginning a rate-cut cycle in 2025.

The latest policy decision marks a shift in the RBI’s stance amid renewed inflationary and external risks. RBI Governor Sanjay Malhotra said near-term rate cuts were no longer on the table and announced a change in the policy stance to “Calibrated Tightening”.

“Policy action ahead can only be a repo rate hike or a pause, depending on the evolving conditions and the outlook,” Malhotra said after the three-day MPC meeting.

The latest move means prospective and existing borrowers will need to factor in the possibility of higher financing costs, particularly if further rate increases are required to contain inflationary pressures.