RBI rate hike to raise home, car loan borrowing costs

India's central bank raised its policy rate by 25 basis points to 5.50% on Wednesday, marking the first increase since February 2023. This move, made unanimously by the monetary policy committee, signals a period of "calibrated tightening." Reserve Bank of India Governor Sanjay Malhotra ruled out rate cuts for the time being, leaving future hikes or pauses as the only options.

The hike, the first in nearly four years, will affect home, car, and personal loan borrowers, potentially leading to higher monthly installments or extended repayment periods.

The impact on existing borrowers hinges on the benchmark in their loan agreement. Loans tied to external benchmarks must have their rates reset at least once every three months. If a bank passes on the full rate increase, these loans will become more expensive at the next reset. Fixed-rate loans are not affected by this decision.

External benchmark-linked loans, which constitute 68.2% of banks' outstanding floating-rate rupee loans as of June, will bear the brunt of the rate hike. Additionally, loans linked to banks' marginal cost of funds-based lending rate (MCLR), accounting for 29.6% of total loans, will also be impacted. However, MCLR-linked loans, including certain MSME loans and corporate borrowings, will only feel the effects after their next reset date, which is determined by the loan contract and may not align with the bank's MCLR adjustments.