All eyes were on the Reserve Bank of India as its Monetary Policy Committee (MPC) concluded its meeting. For millions of Indians with loans, this wasn't just economic news—it was a decision with a direct impact on their household budgets.
The October Verdict: A Hawkish Pause
The RBI's six-member
Monetary Policy Committee has decided to keep the policy repo rate unchanged. This marks another consecutive meeting where the central bank has opted for a pause, maintaining the benchmark rate at which it lends to commercial banks. This decision was widely anticipated by a majority of economists and market analysts. The move signals a 'wait and watch' approach, as the RBI continues to monitor persistent inflationary pressures and volatile global economic conditions before making any decisive moves. The focus remains squarely on bringing inflation down to its target, suggesting that while rates haven't gone up now, the possibility of future hikes remains firmly on the table.
Why the RBI Chose to Wait
The decision to hold the repo rate is a delicate balancing act. On one hand, the central bank is tasked with controlling inflation, which has been a persistent concern due to factors like high crude oil prices and supply chain disruptions. Raising rates is the primary tool to curb inflation by making borrowing more expensive, thereby reducing demand in the economy. On the other hand, the RBI must also support economic growth. A rate hike could stifle investment and consumption, potentially slowing down the growth momentum. By holding the rate steady, the RBI is giving itself more time to assess incoming data without immediately tightening financial conditions. The commentary from the governor highlighted that the war against inflation is not over, and the committee remains ready to act if the situation warrants.
Impact on Your Home Loan EMI
For the majority of home loan borrowers, especially those whose loans are linked to an External Benchmark Lending Rate (EBLR), this decision brings immediate, albeit temporary, relief. Since most new loans taken after October 2019 are linked to the repo rate, an unchanged rate means your Equated Monthly Instalment (EMI) will not increase for now. However, it is crucial to remember that borrowers have already seen their EMIs or tenures increase significantly from previous rate hikes. The current pause simply means rates are holding at their elevated levels, not decreasing. Lenders must offer borrowers the option to either increase their EMI or extend the loan tenure when rates rise, and it's a choice that has a long-term financial impact.
What About Car and Personal Loans?
The impact on car loans and personal loans follows a similar logic. Loans with floating interest rates that are benchmarked to the repo rate will also see no immediate change in their EMIs. This provides a degree of predictability for borrowers in the short term. However, for those considering new loans, the current interest rate environment remains relatively high. Banks had already priced in the previous series of repo rate hikes into their lending rates, and this pause does not signal a return to the ultra-low interest rate regime of the past. Borrowers with loans tied to the Marginal Cost of Funds-based Lending Rate (MCLR) might see different outcomes, as banks adjust these rates based on their own cost of funds, which can lag behind repo rate changes.
Good News for Savers?
Higher interest rates are a double-edged sword. While they are a pain point for borrowers, they are generally good news for savers, particularly those who rely on fixed deposits (FDs). When the repo rate is high, banks tend to offer more attractive interest rates on FDs to attract deposits. The current pause means that the attractive FD rates that have been available are likely to persist. Savers can continue to benefit from these higher returns, but a significant further increase in FD rates is unlikely unless the RBI signals a clear move towards another rate hike cycle. For now, it represents a stable and favourable environment for risk-averse investors who prefer the safety of fixed deposits.
