The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is scheduled to announce the results of its review meeting on October 7. Economists and financial institutions believe that the central bank may increase the repo rate by 25 basis points (bps) in this meeting. Moreover, experts predict that interest rates may increase further in the coming months. This step of RBI will have a direct impact on common borrowers and fixed deposit (FD) investors. Tomorrow it will be announced whether there will be an increase in the repo rate or not. According to Union Bank of India, the repo rate may increase between 5.75% to 6% during FY 2027. On the other hand, Japanese brokerage firm Nomura estimates two hikes of 25 basis points in October and December, taking the terminal rate to 5.75%. A survey of 19 economists, finance ministry chiefs and fixed income experts by Bussiness found that most believe the MPC is likely to raise the repo rate by 25 bps to 5.5%. If this happens, it will be the first increase in the repo rate since February 2023. Only four experts believe rates will remain unchanged. Direct impact on home loan EMIs The increase in repo rate by 25 basis points will increase interest rates for borrowers whose home loans are linked to an external benchmark (such as EBLR or repo rate). According to Adhil Shetty, CEO of BankBazaar, “If a customer has taken a home loan of ₹50 lakh at 7.5% interest rate for a tenure of 25 years, their current EMI is approximately ₹36,950 per month. After the increase of 25 basis points, this EMI will increase by approximately ₹817 per month. Over the entire tenure of the loan, the customer will have to pay additional interest of approximately ₹2.45 lakh.” Generally, interest rates on repo-linked loans are reset a few months after the policy change. Depending on their terms, banks may increase your monthly installment (EMI) or extend the loan tenure. Adhil Shetty advises borrowers to reduce this additional financial burden by increasing their EMIs slightly or making partial upfront payments on an annual basis. Existing fixed deposit investors will not get immediate benefits; Consider this strategy. There is news of both relief and warning for those investing in fixed deposits (FD). There will be no change in the interest rates of FDs already deposited due to increase in repo rate. Your existing FD will continue to earn the original fixed interest rate till maturity. Adhil Shetty said that the benefit of higher interest rates mainly accrues to those who open new fixed deposits or renew their existing fixed deposits. For example, if banks pass on the full benefit of the 25 basis points (bps) increase to customers, a new fixed deposit of Rs 10 lakh could earn additional interest of around Rs 2,500 per annum before tax. However, experts have suggested a specific strategy to earn more interest on fixed deposits. According to him, in the current circumstances the maturity date of fixed deposits becomes very important. If you expect interest rates to rise further, consider adopting a 'fixed deposit laddering' strategy instead of investing your entire capital in a single fixed deposit. By dividing your investment into fixed deposits with different maturity dates, you can ensure availability of cash (liquidity) over time and enjoy higher interest rates at each maturity. However, the actual increase in fixed deposit rates will depend on how individual banks implement the RBI decision.
