Loans to get costlier as RBI hikes key lending rate to 3-year high

The Reserve Bank of India hiked its key lending rate by 0.5 per cent to a three-year high of 5.90 per cent, which will weigh heavily on the already stretched budgets of Indian households dealing with a rise in prices of almost every item.

The 50 basis points hike marks the fourth consecutive increase since May 2022. The rate hikes were made necessary by inflationary pressures, the situation in Ukraine, and microeconomic uncertainty in advanced economies from aggressive central bank policies globally.

That has had a contagion impact on the Indian economy and financial markets, forcing the RBI's hands to tighten policy more aggressively.

Indian banks are certain to pass on the latest RBI rate hike to customers immediately, as seen in recent months, making loans costlier and leading to higher equated monthly instalments (EMIs).

Financial experts suggest that to negate the recent and expected rise in borrowing rates, consumers could postpone a new loan and pre-pay existing loans to reduce the burden.

Consumers will be able to shorten their loan terms and EMIs if they pre-pay a part of their loans. as 

"If you took a home loan at 7 per cent for 20 years, your per lakh interest is ₹86,071. Your per lakh EMI is ₹775. If your rate goes to 8.9 per cent after three months, you had 237 EMIs left, but now it could theoretically go to 410 months assuming the same EMI. Assuming a bigger EMI, the tenor extension will be smaller. But at 410 months, your loan is 173 months or nearly 14.5 years longer," said Bankbazaar.com's CEO.