After the latest rate rise, expect your EMIs to increase

Customers need to brace themselves to pay much more on their home, auto and other loans. For the 10th consecutive time, the Reserve Bank of India (RBI) has increased key policy rates. The 25-basis-point rise will mean a higher cost of borrowing for banks, which will be passed on to customers.

After the last rise in rates on May 3, a total of 45 banks raised their base rates by 25-100 basis points. This time too, the increase is expected to put pressure on both, short-term deposit rates and lending rates. However, when the banks will raise their base rate will depend on their individual liquidity conditions.

Home loan borrowers will be hit the hardest. The last two years have already seen the interest on home loans going up by at least two per cent; from about eight per cent to above 10 per cent, now. A rise in the lending rates would mean consumers pay higher equated monthly installments (EMI) on their loans. For existing home loan borrowers, irrespective of whether your loan is linked to the bank’s base rate or its prime lending rate, you will have to bear a rise in your EMI. New home loan borrowers might have the option of negotiating and choosing between banks charging lower interest rates.

Even buying a car will get more costly. While fixed interest rate auto loans will remain the same, those with a variable interest rate will see a rise in their EMIs. The rate increase will only push down the demand for cars further, say experts. Petrol prices were raised last month and there are talks of an increase in diesel prices, too.

However, some investment schemes, especially those with a shorter tenure of less than a year, will benefit. Short-term bank deposits and debt funds such as liquid, liquid-plus or ultra short-term schemes having a lower maturity will benefit from the rate rise. Also, with RBI intent on taming the high inflation, managers expect further upward movement in rates that would only benefit these schemes.

Right now with uncertainties regarding further rate rise, it is best not to invest in funds with long tenures as the yield will drop if RBI continues to increase rates. Longer the duration, more is the risk, say experts.

The short-term will also provide flexibility to investors who can shift schemes if there is a change in the interest rate cycle.