Risk of Rising EMIs! RBI May Hike Repo Rate Again; Could Reach 6%

The RBI's Monetary Policy Committee (MPC) is scheduled to meet from October 5 to 7, with a decision on a potential repo rate hike likely. A 25-basis-point increase could raise the rate to 5.50%, potentially making loan EMIs more expensive.

If you are repaying a home loan, car loan, or personal loan, the Reserve Bank of India's (RBI) upcoming meeting is significant for you. During this meeting, the issue of raising the repo rate will be discussed amidst factors such as inflation, crude oil prices, and the depreciation of the rupee. If this happens, the burden of your EMI could increase in the near future.

The RBI's MPC meeting is set to take place between October 5 and 7, with the decision to be announced on October 7. Currently, the repo rate stands at 5.25%. However, market expectations suggest that the RBI might hike the repo rate by 25 basis points. Furthermore, a report by Union Bank projects that the repo rate could eventually reach the 5.75% to 6% range.

Why might the RBI hike the repo rate?

The RBI decides whether to raise or lower the repo rate based on the country's inflation and economic situation. However, the central bank is currently facing several factors that have led to expectations of an interest rate hike:

Inflation is witnessing a resurgence.
High crude oil prices continue to pose a risk of rising inflation.
The rupee has weakened against the US dollar.
Changes in interest rates and bond yields in the US and other countries are impacting India.
Excess liquidity in the banking system and the demand for loans could also influence the RBI's decision.

RBI's focus on inflation and crude oil

Inflation remains one of the most critical issues for the RBI. Retail inflation rose to 4.82% in August, up from 4.45% in July. This rise in inflation suggests that volatility in the prices of essential food items could lead to increased inflationary pressure in the near future. Additionally, the surge in crude oil prices is a cause for concern for India, as the country relies heavily on imports to meet its energy needs.

Consequently, if crude oil remains expensive in the international market, the import bill for commodities ranging from petrol and diesel to transport and other goods could rise, potentially impacting the pockets of the common man.

Could the repo rate reach 6%?

According to a Union Bank report, the RBI might hike the repo rate by 25 basis points in October. Further hikes—one or two more—are projected for the 2027 fiscal year. If this materializes, the repo rate could gradually climb to the 5.75%–6% range. However, the final decision will be taken during the RBI's Monetary Policy Committee (MPC) meeting.

How will this affect your EMI?

If the RBI raises the repo rate, borrowing costs for banks could increase. This is likely to impact loans with floating interest rates, such as home loans. Consequently, a rise in interest rates could lead to higher EMIs or an extension of the loan tenure.