The direct impact of the economic turmoil in America, the largest center of the global economy, is now visible on the Indian markets and the pockets of the general public. Indications of the US Federal Reserve (US Fed) keeping interest rates at a high level for a long time, the rise in US bond yields and the strengthening of the dollar in the global market have made it extremely challenging for the Reserve Bank of India (RBI) to cut the policy interest rates (Repo Rate) soon. Middle class borrowers and home buyers who were long hoping for reduction in home loan interest rates and reduction in monthly EMI burden, may now have to pay expensive EMIs for some more time. How US market turmoil affects India In the global financial system, whenever the US Federal Reserve keeps its interest rates high, international investors start pulling their capital out of emerging markets (like India) and into safe assets like US bonds and the dollar. This increases the pressure on the Indian rupee against the dollar. Due to weakening of rupee, import of crude oil, electronics and other raw materials becomes expensive for India, which creates the danger of increasing 'imported inflation' at the domestic level. In such a situation, to control inflation within the country, RBI has to maintain its monetary policies strict and avoid cutting interest rates. What is the challenge before RBI and why rate cut can be postponed? The Monetary Policy Committee (MPC) of the Reserve Bank of India mainly works with the aim of maintaining the retail inflation rate (CPI) within the range of 4 percent. Amid uncertainty in domestic food prices and pressure from the international market, if the central bank cuts interest rates prematurely, it will increase cash flow in the market and inflation may again go out of control. Additionally, the risk of selling by foreign institutional investors (FIIs) also increases as the interest rate differential between the US and India narrows. This is the reason why the Reserve Bank of India is sticking to the policy of 'wait and watch' and the possibility of rate cut seems to be slipping further at the moment. Direct impact on your home loan EMI and budget Most new home loans offered by banks are linked to the 'External Benchmark Lending Rate' (EBLR/RLLR), which is directly based on the RBI repo rate. The wait for relief in EMI increases: If the repo rate is not cut, there will be no reduction in home loan interest rates by banks. For example, an interest reduction of 0.50% on a 20-year home loan of ₹50 lakh would result in savings of about ₹1,600 to ₹1,800 every month, but borrowers will not be able to get this relief if rates remain fixed. Increase in loan tenure: Many customers with floating rate loans have already had their loan tenure extended instead of the monthly EMI amount. If the rates are not reduced, they will have to pay interest for a long time. Impact on auto and personal loans also: Along with home loans, the scope for immediate relaxation in the rates of car loans and personal loans has also been limited. Important advice for borrowers: How to reduce the financial burden Adopt part-payment strategy: If you have any bonus, PF share or additional savings, then pre-pay 5% to 10% of your home loan every year. This will reduce your principal amount faster and the total interest burden will reduce significantly. Talk to the bank about reducing the spread: Contact your existing bank to see if they can reduce the spread (margin) on your loan for a nominal conversion fee. Explore balance transfer option: If another bank or housing finance company is offering interest rates that are significantly lower than your existing lender, consider balance transfer after assessing the processing fees and charges.
