rbi rate hike: How RBI’s rate hike will impact borrowers and investors

Interest rates have started moving up, following the recent volley of repo rate hikes by the RBI. At least four major banks have already increased their lending rates and more are likely to follow soon. The hike will mean higher EMIs for new loans and extended tenures for existing floating rate loans. At the same time, banks have raised their deposit rates, bringing cheer to investors. Here is how the rate hike will impact borrowers and investors.

If you have a floating rate loan…

The interest rate will go up, which will extend the tenure of the loan. The impact will be bigger on longer loans. In case of a 20-year loan, at 7%, every 0.25% hike in rate will increase the tenure by roughly 10 months. The repo rate has been hiked by 0.9% in two tranches. If your home loan has 19 more years to go and the rate is increased by 0.75%, be ready to pay 30 more EMIs.

The impact will not be so dramatic in shorter tenure loans. So if your home loan is nearing completion, you need not get too worried by the rate hike.

If you do not want the loan tenure to be extended, you can either make a lump-sum payment or request for an increase in the EMI. If the interest rate is hiked from 7% to 7.75%, you will need to pay roughly Rs 5,000 per Rs 1 lakh to retain the original tenure. Alternatively, you can get the EMI increased so that the tenure remains the same. The EMI will be increased by roughly Rs 45 per Rs 1 lakh.

If you are planning to take a loan…

As interest rates go up, so will the EMIs. Here again, the impact will be greater in long-term loans while short-term borrowings will see a marginal difference. Every 0.50% increase in a 20-year home loan interest rate will add roughly Rs 30 to the EMI per Rs 1 lakh.


If you are a fixed income investor…

Though borrowers will feel the pinch due to higher interest rates, fixed income investors have reasons to smile. Banks have started increasing their deposit rates, which means higher returns for investors.

The rate hike has pushed up government bond yields. So, small savings rates may also get revised upwards. Small savings rates are linked to government bond yields of the same maturity and are reset every quarter. But political compulsions prevented the government from cutting these rates even though bond yields consistently declined during 2020-21. A steep 60-70 basis rate cut was hastily rolled back in April 2021 following a public uproar.

Now that bond yields have risen sharply, small savings rates could be revised upwards. The PPF rate is 7.1% while the Senior Citizens’ Saving Scheme gives 7.4%. Even if these are not revised, there is virtually no possibility of a cut when the rates come up for revision at the end of this month.

If you invest in debt funds and the NPS…

Debt mutual funds have suffered due to the consistent rise in bond yields over the past 18 months. The benchmark 10-year bond yield has risen from 5.8% in January 2021 to 7.5% now. When bond yields go up, the value of existing bonds falls. Bond funds and NPS funds that hold long-term securities have been the worst hit. The pain is not yet over because the RBI is not done with rate hikes. Analysts feel there could be another 25-50 basis point hike in repo rates in this financial year.

If rates are hiked further, bond yields will go up more. Investors should, therefore, focus on short duration debt funds which are not so badly hit when the rates move up.

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