The Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50 per cent, the first such hike since February 2023. The Monetary Policy Committee (MPC) also shifted its stance from “neutral”
to “calibrated tightening”, signalling that inflation risks are once again becoming an important consideration for monetary policy.
The repo rate changes can eventually feed through to household finances- affecting borrowing costs, deposit rates and some investment products. However, not every financial product changes automatically when the repo rate moves.
Here are 7 things that could change for your money after RBI’s rate hike today:
1. Your floating-rate loan could become more expensive
The biggest immediate concern for borrowers is the cost of loans. When the RBI raises the repo rate, banks and other lenders can face higher funding costs. This can eventually translate into higher interest rates on loans, particularly those linked to external benchmarks. For retail and MSME borrowers, banks are required to link floating-rate loans to an external benchmark. The RBI’s repo rate is one of the permitted benchmarks. This means borrowers with eligible floating-rate home, car or personal loans could see their interest rates rise when their lender resets the rate.
2. New FDs could offer better interest rates
There is a potential positive for savers. Banks may raise interest rates on fresh fixed deposits if they need to attract more deposits in a higher-rate environment. The repo-rate hike therefore creates room for FD rates to move higher, although banks are not required to increase them immediately or by the same 25 basis points. The opportunity for a higher return comes when you open a new FD or renew one after maturity.
3. Your savings-account interest may not rise automatically
A higher repo rate does not mean your savings account will suddenly start earning 25 basis points more. Savings-account interest rates are determined by individual banks and their pricing strategies. Banks may choose to revise them but there is no automatic one-to-one transmission from the repo rate to the rate on your savings balance.
4. Credit-card users don’t automatically pay 25 bps more
Credit-card interest rates are governed by the terms and pricing of the card issuer and do not work in the same straightforward way as a repo-linked floating-rate home loan. For people who pay their entire credit-card bill by the due date, the bigger issue may not arise at all, since purchases generally do not attract interest when the full outstanding amount is paid within the applicable interest-free period. The real risk is for people who carry a balance from one billing cycle to another.
5. Debt mutual funds could feel the impact differently
The RBI’s rate hike can also affect fixed-income investments such as debt mutual funds but the relationship is different from that of a bank FD. When interest rates and bond yields rise, prices of existing bonds generally fall. Since debt mutual funds invest in bonds, this can put pressure on their net asset values (NAVs), particularly in funds holding longer-duration securities. The impact depends on factors such as the fund’s duration, portfolio composition and the extent of the movement in bond yields.
6. PPF, NSC and other small-savings rates don’t change with repo rate
If you invest in government-backed small-savings schemes such as PPF or NSC, don’t expect the RBI’s repo-rate decision to immediately change your interest rate. These schemes are governed by the government’s small-savings framework and their rates are reviewed separately.
7. New borrowers may have to shop around more carefully
The wider impact of a rate hike is that borrowing could become more expensive across the financial system which makes it particularly important for someone planning to take a new home, car or personal loan to compare lenders instead of looking only at the advertised interest rate. A difference in the interest rate may look small but over a long loan tenure it can significantly affect the total amount repaid. Borrowers should also compare processing fees, reset clauses, tenure and other charges before choosing a lender.
