RBI's repo rate hike pause: What relief can home loan borrowers get? Should you invest in FDs now?

As widely expected, the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 6.5 per cent owing to headline inflation, currently at 5.4 per cent, remaining within RBI's tolerance range.

Today's announcement, the third repo rate pause implemented by the RBI, will relieve borrowers tackling rising debt burdens due to a series of rate hikes over the last 15 months, increasing the repo rate by 250 basis points. However, the possibility of a future spike in inflation causing interest rates to rise further is something that borrowers should be prepared for.

Adhil Shetty, CEO of BankBazaar.com, said, "Borrowers grappling with the effects of previous rate hikes will get much relief following today's announcement. However, simply continuing with scheduled payments may no longer be sufficient, and borrowers must re-calibrate their repayment strategies to reduce their debt burden. Prepaying 5% of your loan balance each year or refinancing your loan to a lower rate are the two most effective methods that help in lowering interest outgo and tenure. In the case of refinancing, calculate how much you will save after moving to a lower rate."

The background to the regulatory announcement on EMIs is that the RBI has been, over a prolonged period, pushing for transparency and communication. Shishir Baijal, Chairman & Managing Director, Knight Frank India, said, "This stance will likely boost homebuyers’ confidence as affordability remains stable. Since the interest rate upcycle, the repo rate has been hiked by 250bps, resulting in a 160bps rise in home loan rates."

"For home loan borrowers, fixed-rate loans may be available at some discount compared to floating-rate loans. However, since rate cuts are expected in the foreseeable future, it is better to continue with floating interest rate loans for now," said Anshul Gupta, Co-Founder and Chief Investment Officer of Wint Wealth.

At various stages, it has insisted that regulated entities such as banks communicate clearly to consumers, especially on charges and key facts. After credit cards and personal loans, the RBI is now setting the same guidelines for home loans as well. While banks have responded very well to this requirement, some work may still need to be done.

"In the last year, as the repo rate moved from 4.00 to 6.50 per cent in just a few months, we've encountered some shocking extensions in home loan tenors. For example, someone who borrowed for 20 years suddenly sees a 30-year tenor jump. The RBI has asked for communication between borrowers and lenders so that such elongations and EMI hikes due to interest rate variations do not shock the borrower. Interestingly, the RBI is also asking for options to switch to fixed-rate loans, which most banks do not typically offer," said Shetty.

Experts view on fixed deposit rates: Over the last 15 months, average interest rates on outstanding rupee bank deposits have risen monthly. Also, during the brief periods of rate pauses, bank FD rates have also continued to nudge upwards. Thus, experts believe now is a good time for investors to lock into the best available rates. "Shetty said investors can reinvest their deposits for higher rates available in tenures ranging from 1-3 years. Investors can also consider laddering their FDs to maximise their returns further."

Gupta said, "For retail investors, this is a good time to lock in their desired fixed-income allocation in bank FDs. 10-year Gsec yields, after having fallen to 7 per cent in June have risen to 7.2 per cent in August. Investing in long duration debt funds can also be a good strategy. As the interest yields start falling, the capital appreciation of long duration bonds can give good returns."