RBI maintains repo rate: What does this mean for your EMIs?

The Reserve Bank of India has left its key interest rate unchanged.The monetary policy committee (MPC), which has three members from RBI and an equal number of external experts, voted unanimously to keep the benchmark repurchase, or repo rate unchanged at 6.50 per cent.It decided five to one to retain the policy stance focused on "withdrawal of accommodation", which was introduced in April last year.But what does this mean for your EMI?Let’s take a closer look: The repo rateBut first, let’s take a brief look at the repo rate.The term ‘repo’ stands for repurchasing option or repurchase agreement, according to Business Standard.For those not in the know, the repo rate is the rate at which the RBI – the country’s central bank – lends money to all commercial banks (who approach the RBI whenever face a liquidity shortfall).As per Business Standard, commercial banks usually proffer securities such as treasury bills or gold to the RBI in order to get such a credit.

According to the Economic Times, financial authorities use the repo rate to control inflation.

The RBI tends to respond to increased inflation by increasing the repo rate.This in turn makes it more expensive for commercial banks to borrow money.Commercial banks and non-banking financial companies (NBFCs) respond to the increased repo rate by usually increasing lending and deposit rates.This translates to the common man forking out more money when it comes to EMIs on home loans, car loans and personal loans.What does the pause mean for the common man?Experts say this means that those with existing home loans should see no change in EMIs.According to Business Standard, this is because when the RBI maintains status quo on repo rate, it keeps the cost of funds for lending institutions stable.But those with floating rate loan may benefit from a rate pause."A repo rate pause signals that the RBI is maintaining a status quo until the economy improves substantially. A rate hike, on the other hand, means that the cost of funds for banks will increase, which will then drive up EMIs for home loan borrowers. For example, if you have a floating rate home loan, a rate hike may drive up your loan rate and EMIs. Higher EMIs can reduce a borrower’s disposable income and affect their consumption pattern," said Shetty.

Some say the question now is whether borrowers should choose a floating or fixed rate for the home loan going forward.

“For home loan borrowers, it is better to stick to their floating interest rate loans for now. Fixed-rate loans may be available in the market at some discount compared to floating-rate loans. However, considering that rate cuts are expected a few quarters down the line, it makes sense to stick to floating rate loans,” Anshul Gupta, co-founder and chief investment officer of WintWealth told the newspaper.“With the repo rate remaining unchanged, borrowers are now faced with the difficult decision of whether to opt for fixed-rate loans that may be available at a discount or stick to floating-rate loans. While fixed-rate loans offer an assurance of a constant repayment amount, they come with a higher initial cost. On the other hand, floating-rate loans offer more flexibility but could result in higher EMIs in case of an increase in interest rates,” added Atul Monga, CEO and co-founder of Basic Home Loan.According to ZeeBizz, some think the RBI will likely reduce key lending rates – either later this year or early next year.Such a reduction in the repo rate – known as rate transmission in banking parlance — will likely cause commercial banks to cut their own interest rates on home loans.Market veteran Ajay Bagga told the website the cut can come in October or November.But Anuj Puri, chairman of property consultant ANAROCK Group, told the website that home loan customers can expect relief “…if and when repo rates come down and banks reduce their interest rates”."Alternately, interest rates can come down if banks announce promotional lending rates to fuel interest, as was seen during the first phase of the pandemic," Puri added.With inputs from agenciesRead all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.