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# How a change in RBI’s repo rate impacts your home loan EMIs?

3 min read Aug 11, 2023

The Reserve Bank of India’s (RBI) policy meetings never fail to create a buzz among home loan borrowers. In its latest meeting, the Indian central bank kept the repo rate unchanged at 6.50%. If you're someone with a home loan, you might be curious about what this means for you. Read on to understand the math behind it.

## What is the repo rate and how it impacts your home loan EMIs?

The repo rate, or repurchasing option rate, is the rate at which the RBI lends money to banks. The RBI typically uses this tool to control inflation in the economy. You might be wondering how this affects your loan EMIs.

So, let us understand the whole cycle: When the economy is doing well and growing, there's a lot of money flowing around (high liquidity in the system), which can lead to a price rise – that's inflation. Thus, to control high inflation and tighten the liquidity in the system the RBI increases policy rates (repo rate, CRR, and others). As a result, banks will be discouraged to borrow at a higher rate from the RBI. Most bank loans today are tied to the repo rate. This means, when the repo rate goes up, so do the interest rates on loans. For instance, consider a scenario where you have a home loan of Rs 50 lakh at an annual rate of 8% for 20 years. If the interest rate climbs to 9%, your monthly EMI will increase by approximately Rs 3,164, jumping from Rs 41,822 to Rs 44,986.

In the same vein, if the RBI decides to cut the repo rate, the interest rate on loans, including the EMI amounts, will fall correspondingly. To sum it up in simpler terms: an increase in the RBI repo rate will lead to higher loan EMIs and the reverse is true as well.

## What to infer from the RBI’s latest policy decision?

To combat high inflation, the RBI has been increasing the repo rate since May of last year. During this period, the central bank has raised the repo rate from 4% to the current 6.5%. This has led to rising interest rates on different types of loans. However, since April 2023, the RBI has been maintaining the status quo on the policy rate at 6.5% for the third consecutive policy. No change in the repo rate means there will be no change in your loan EMI and you will continue to pay the same EMI and interest as earlier.

For those who are paying loan EMIs, the critical factors that will shape future changes in the repo rate – and consequently shifts in home loan interest rates – are domestic inflation and global conditions. The main task of the RBI is to maintain retail inflation within the band of 2-6%. When the RBI began raising the repo rate in May 2022, retail inflation reached its peak at 7.79% due to global trends. However, the aggressive rate hikes by the RBI subsequently lowered inflation to a historical low of 4.31% in May 2023. Nevertheless, inflation has risen again to 4.81% in June on the back of higher essential food prices. Therefore, the inflation trajectory will be pivotal for any future course of monetary action.

## What borrowers should do?

Changes in interest rates are a function of various macroeconomic factors which are not in our control. So, borrowers can't do much about these interest rate changes. Nevertheless, there are certain strategies that may help you manage your home loan EMI better.

• Make frequent part payments: Making frequent part payments can expedite loan repayment and result in substantial interest savings.
• Home loan balance transfer: If you feel that your current home loan interest rate is too high, you can opt for a home loan balance transfer.
• Extend your home loan tenure: By extending the loan tenure, you can reduce the EMI amount, making it more manageable.
• Keep a high credit score: Having a good credit score enables you to discuss getting lower interest rates with lenders. Read here to know more about credit score and how to maintain a good score.
• Higher down payment: For those looking to buy a home, making a bigger initial payment decreases the main loan amount, thus decreasing the overall interest you will pay.

By following these strategies, you can ease the weight of EMI burden and improve the manageability of your home loan. Axis Bank offers an attractive home loan interest rate and longer loan tenure, along with a minimal processing fee. All these aspects combine to make a home loan well within your affordability.