SBI Research expects 25 bps RBI rate hike in October: Impact on home loans, EMIs and FDs

The Reserve Bank of India (RBI) may raise the repo rate by 25 basis points (bps) at its October policy meeting to counter rising inflation risks, elevated crude oil prices and persistent external shocks, according to SBI Research.

For consumers, however, the key question is what a possible rate hike could mean for home loans, EMIs, personal loans and fixed deposits.

What SBI Research is saying

The report said its recommendation comes against a backdrop of changing economic conditions, particularly higher crude oil prices and growing geopolitical uncertainty.

“Just one month back, there were practically not much talks of rate hikes, and most (if not all) expected a ‘prolonged pause’. But the situation has changed drastically since then,” SBI Research said.

Crude oil prices have recently crossed $100 per barrel. The report estimates that prices could rise to as much as $123 per barrel over the next 15 days if geopolitical tensions remain elevated.

SBI Research said its rate-hike recommendation is independent of any potential move by the US Federal Reserve.

What could a rate hike mean for your home loan, EMI and fixed deposits?

A higher repo rate can increase borrowing costs across the financial system. Borrowers with floating-rate home loans could see their interest rates rise if banks pass on the increase.

This could either increase the monthly EMI or extend the loan tenure, depending on how the lender adjusts the loan.

For people planning to take a new home loan, a rate hike could also mean slightly higher borrowing costs.

However, the actual impact will depend on how quickly and fully banks transmit any change in the repo rate to their lending rates.

For savers, higher interest rates can have a more positive impact.

Banks may increase fixed deposit (FD) rates to attract deposits if lending rates rise. This could benefit people who are looking to invest in new FDs or renew maturing deposits.

Existing FD investors, however, generally continue to earn the rate applicable when they booked the deposit until maturity. The benefit of higher rates would therefore be more relevant when opening a new FD or renewing an existing one.

Why is inflation a concern?

SBI Research said retail inflation is showing early signs of becoming more broad-based.

The report highlighted rising input costs across several sectors, including crude petroleum and natural gas, beverages, pharmaceuticals and electronics. It warned that businesses may eventually pass these higher costs on to consumers.

Restaurant inflation has also risen sharply as the prices of onions, edible oil and LPG have increased, the report said.

“If oil prices remain at high levels, inflation print for October and November should move towards 6.5 per cent or higher,” SBI Research said.

A possible rate hike does not necessarily mean consumers need to make immediate changes to their finances.

The October MPC meeting will provide the next major indication of how the central bank views the inflation and growth outlook. SBI Research’s recommendation is therefore a forecast, not an indication of what the RBI will necessarily do.

Disclaimer: This article is written purely for informational purposes and should not be considered investment advice from Upstox. Securities mentioned are illustrative and not recommendations. Investors should do their own research or consult a registered financial advisor before making investment decisions.