RBI hikes repo rate by 0.25%; home and car loans to become costlier—find out how much EMIs will rise..

In a major move to curb inflation, the Reserve Bank of India (RBI) has raised the repo rate by 25 basis points (0.25%). Consequently, the repo rate has increased from 5.25% to 5.50%. The RBI's Monetary Policy Committee (MPC) took this decision unanimously. This marks the first time in nearly four years that the RBI has hiked the repo rate. This move will make funding costlier for banks, which could eventually impact interest rates on customer loans.

This could directly affect borrowers with floating-rate home loans, car loans, and other credit facilities. If banks pass on the full impact of the repo rate hike to customers, EMIs could rise, or loan tenures could be extended.

Why was the repo rate hiked?
Inflation is currently the biggest challenge facing the RBI. Retail inflation rose to 4.82% in August, remaining above the RBI's 4% target for the third consecutive month. Additionally, crude oil prices have surged due to tensions in West Asia. High crude oil prices are a concern for India, as they can drive up costs for everything from petrol and diesel to transportation and other commodities.

Home loan EMIs could rise.
The repo rate hike is likely to have the most significant impact on floating-rate loans. An increase in the repo rate raises the cost of funds for banks, which can influence the interest rates charged on customer loans.

For instance, suppose you have taken a home loan of ₹50 lakh for 25 years at an interest rate of 7.50%. Currently, your EMI is approximately ₹36,950. If the interest rate rises by 0.25% to 7.75%, your EMI would increase to around ₹37,766. This means you might have to pay an additional ₹817 per month. This amounts to an additional burden of approximately ₹9,800 over the course of a year. However, the actual impact will depend on your bank's reset date and the specific terms of the loan.

Some banks might choose to extend the loan tenure instead of increasing the EMI. Meanwhile, loans with fixed interest rates may not see an immediate impact.

Could car and personal loans also become costlier?
Apart from home loans, interest rates on car loans, two-wheeler loans, and personal loans could also be affected. Borrowers seeking new loans, in particular, may face higher rates. For those with existing floating-rate loans, EMIs or loan tenures could increase.

Good news for FD holders
Savers and fixed deposit (FD) investors stand to benefit from the hike in the repo rate. If banks raise deposit rates as well, those opening new FDs could earn higher interest.

For instance, if you open a one-year FD of ₹10 lakh at an interest rate of 7%, you would earn approximately ₹70,000 in interest. If the rate rises to 7.25%, the interest earned would be around ₹72,500—meaning an additional ₹2,500. However, the interest rate on existing FDs generally does not change; the benefit of the higher rate applies when opening a new FD or renewing an old one upon maturity. Here is what Mr. Pradeep Aggarwal, Founder and Chairman of Signature Global (India) Limited, has to say on the matter:

"Amidst challenging macroeconomic conditions, the RBI's decision to hike the repo rate by 25 basis points (bps) to 5.25% demonstrates its resolve to maintain price stability. While housing demand has been bolstered by rising incomes, urbanization, and an increasing aspiration for homeownership—remaining robust despite global uncertainties—factors such as fluctuating crude oil prices, currency pressure, and persistent inflationary risks have complicated the central bank's task. The RBI has consistently balanced growth and stability, and this decision reflects the prevailing macroeconomic environment.

Nevertheless, maintaining the repo rate unchanged could have better sustained the current momentum of demand. Higher borrowing costs might temporarily dampen the enthusiasm of homebuyers, particularly in the mid-income segment. However, given the strong fundamentals and the upcoming festive season, we remain optimistic that the sector will continue to perform strongly."

Disclaimer: This content has been sourced and edited from Dainik Jagran. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.