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What happens to my loans if RBI increases rates today?

Tuesday, 25 January 2011 - 2:19am IST Updated: Monday, 24 January 2011 - 11:19pm IST | Place: Mumbai | Agency: DNA
Experts said at worst, equated monthly installments (EMI) on home and other loans could increase by an equivalent amount.

To try and contain high inflation, the Reserve Bank of India (RBI) is widely expected to announce a hike in its policy rates by 25-50 basis points (or 0.25%-0.5%; a 100 basis points makes a percentage point) in the repo and reverse repo rates on Tuesday, during its third-quarter monetary policy review.

Repo pertains to the interest rate at which banks borrow money for one day to a week from the RBI, while reverse repo is the opposite — the rate at which RBI sucks out excess liquidity from the banking system by offering bonds for cash.

So what happens if there is an increase? Experts said at worst, equated monthly installments (EMI) on home and other loans could increase by an equivalent amount. Even if the RBI resorts to a 25 basis points hike, chances of a small rise in lending rates cannot be ruled out, they said, particularly by banks that are yet to increase their base rate.

But banks may also simultaneously increase the interest rate paid on fixed deposits slightly — which will be a good thing for depositors.


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