How does RBI’s steady repo rate at 6.5% influence home loan EMIs? Should investors take a bet on fixed deposits, bonds and stocks?

In its bi-monthly review, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to keep the repo rate (the rate at which the central bank lends short-term money to commercial banks) unchanged at 6.5 per cent. The question now on the minds of many individuals is this: How will this impact those who have taken home loans? 

Repo rates play a crucial role in determining the interest rates that banks offer on loans, including home loans. Any change in the repo rate directly impacts the interest rates of these loans. However, with the repo rate remaining steady at 6.5 per cent, the existing borrowers need not worry about any immediate change in their Equated Monthly Instalments (EMIs). 

The RBI’s view is that developed economies are nearing a peaking of rates. While this is a good move, inflation is expected to remain elevated for longer than anticipated. 

Adhil Shetty, CEO of Bankbazaar.com, said, “We see cautious optimism in the governor’s speech. It suggests that things are difficult right now. But interest rates and inflation are on the right trajectory with limited upside risks, and the central bank will continue to manage growth expectations using all monetary policy tools.” 

Retail inflation declined below 7 per cent in August. However, it remains above RBI’s target of 4 per cent with a margin of 2 per cent either way. Therefore, during the MPC review meeting, the RBI reiterated its hawkish stance. “The elevated crude oil prices also pose inflationary risks in the near term. RBI will likely wait and watch for the next couple of quarters before it decides to reduce the interest rates,” says Anshul Gupta, Co-Founder and Chief Investment Officer of Wint Wealth. 

Impact on home loans: Homebuyers will welcome the pause on the repo rate, though they would also hope for a rate cut soon. “When the central bank keeps the repo rate steady, it results in a sustained period of unchanged or relatively stable rates. This consistency aids prospective homebuyers in planning their finances and commitments. Those looking to purchase properties or refinance existing home loans can find this decision favourable,” said Shetty. 

“Home loan borrowers would do well to stick to their floating interest rate loans for now, even if fixed-rate loans are available at some discount,” added Gupta. 

Subhash Goel, MD, Goel Ganga Developments, said, “An unchanged repo rate is a festive bonanza for homebuyers, as it gives them another chance to buy homes at optimal costs. Based on current trends, the market for consumers appears quite positive with respect to housing markets, which give an impression of the economy’s prosperous health.” 

Gurmit Singh Arora, National President of the Indian Plumbing Association, says, “Another rate reduction is desired to enhance market confidence and to encourage a more prospective housing demand. The MPC rate change will affect all floating-rate home loans. Any change in the repo rate will result in an adjustment of the interest rate of the floating-rate home loan to mirror that of the repo rate. Fixed-rate home loans are independent of changes in MPC rates. Fixed-rate home loans are prone to such risks because the interest rate is locked for 1-5 years. When the repo rate increases, leading to higher housing loan interests, borrowers’ payments will be raised, resulting in higher borrowing costs.” 

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Impact on Fixed Deposits, Bonds and Stocks: While interest rates remain elevated, 2023 remains a good time for depositors—especially senior citizens—to lock into elevated rates for the long term. Several banks now offer 7-8% on long-term tenors. Senior and super-senior citizens will find 50-75 bps more to lock in to. 

Gupta says, “Over the next 3-6 months, retail investors should lock their funds in long-term fixed deposits at higher interest rates. Depending on the goal and timeframe of their investment, they can stagger this investment into a few smaller FDs across different commercial and small finance banks, as well as NBFCs. On the other hand, bond markets have already been discounting rate cuts, and 10-year G-Sec yields are down by 30 bps from this year’s peak levels.” 

“In the governor’s speech today, we have seen cautious optimism for the future. The food inflation spike in July has been followed by a softening of prices. The global economy also looks at the United States to see where they take interest rates. The consensus is that things are difficult now, but 2024 could be much better as and when interest rates start to fall. This would have a positive impact on both stock markets and bond markets,” added Shetty.