The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday voted unanimously to increase the repo rate by 50 basis points to 4.90% in a bid to slow inflation that it estimates will average 7.5% in the current April-June quarter.

Home loans and other retail loans will get more expensive as the Reserve Bank of India raised the repo rate by 50 basis points (bps) on Wednesday, the second hike in two months, taking it to a total hike of 90 bps. Typically, loans linked to repo rates have faster transmission of rate hikes, which is quicker for fresh floating rate loans.

For existing floating rate loans linked to the repo rate, higher rates will be charged based on the borrowers’ interest reset dates. Till then, they would continue to pay their existing interest rates.

Any change in the external benchmark-based lending rate such as a repo rate will lead to a faster transmission as compared with marginal cost of funds-based lending rate where the rates are reviewed every quarter. If a borrower is on a floating rate loan, the EMI may be fixed for the tenure, but the tenure itself will increase with the hike in interest rates.

Home loan borrowers, both fresh and existing ones, having restricted liquidity can opt for the home saver option in which an overdraft account is opened where a borrower can park his surpluses and withdraw from it as per his financial requirements. The interest component of the loan is calculated after deducting the surpluses parked in the account from the outstanding home loan amount.

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