RBI rate hike to raise home, car loan borrowing costs

Mumbai: Home, car and personal loan borrowers are set to face higher borrowing costs after the Reserve Bank of India raised its policy rate by 25 basis points to 5.50% on Wednesday, its first increase since February 2023. Borrowers may see either a higher monthly instalment or a longer repayment period when their loan rate resets.

The monetary policy committee voted unanimously for the increase and adopted a stance of “calibrated tightening”. Governor Sanjay Malhotra said rate cuts were off the table for now, leaving a further increase or a pause as the choices at future meetings.

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The impact on existing borrowers will depend on the benchmark in their loan agreement. Banks must reset rates on loans linked to an external benchmark at least once every three months. A repo-linked home, car or personal loan could therefore become more expensive at its next reset if the bank passes on the full increase. Fixed-rate loans will not be repriced because of Wednesday’s decision.

The exposure is substantial: external benchmark-linked loans accounted for 68.2% of banks’ outstanding floating-rate rupee loans at the end of June, according to the latest RBI data. Loans linked to banks’ marginal cost of funds-based lending rate, or MCLR, accounted for another 29.6%.

State Bank of India currently advertises home loans starting at 7.25% a year. The rate an individual borrower pays, and when it changes, will depend on the loan’s terms and the bank’s subsequent rate revision.

MCLR-linked loans, including some MSME loans and corporate borrowing, will feel the impact later. Their rates change on the reset date specified in the loan contract, while the bank’s MCLR itself responds to changes in its funding costs.