Will home loan EMIs fall soon as RBI holds repo rates?

The wait for home loan borrowers to see a fall in interest rate has been pushed further, as the Reserve Bank of India (RBI) did not cut the repo rate. This is the fifth consecutive RBI Monetary Policy Committee meeting to keep the repo rate unchanged. This pause in repo rate increase started after a significant hike of 2.5% within a short span of 10 months during May 2022 to February 2023.

Home loan borrowers have been going through one of the most testing times as they have to pay almost 20% higher EMI than what they were paying just two years ago. When can home loan borrowers expect the interest rate to fall and how can they make the best of any future rate cut?

When will home loan EMIs fall?

The RBI went on a rate hike spree due to a steep rise in global inflation, after the Russia-Ukraine war started. With inflation subsiding from its peak, the expectation of a rate cut is gaining momentum.

While there may be greater uncertainty about when the rates will start falling, macro indicators show the grounds for a rate cut are getting stronger. Global inflation, which was primarily led by crude oil prices, has significantly subsided. From the highs of $115 per barrel seen in May 2022 after the Russia-Ukraine war started, WTI crude oil prices have fallen significantly. It did rise briefly, touched $91 per barrel in September 2023, but has since cooled down significantly to below $73 per barrel.

The biggest global indicator of interest rate movement is the 10-year US bond yield, which crossed 4.9% in October but fell to 4.22% after that. When it comes to the 10-year Indian government bond yield, the macro trend has been in a decline as it fell significantly from its peak of 7.45% in March. It again rose to a recent peak of 7.38% on October 9, fell to 7.21% on November 17 and rose to 7.26% on December 5.

All these indicate that the overall long-term direction of interest rate is turning around and there is a high probability of the interest rate starting to fall sooner or later. However, several other factors suggest that a rate cut may not happen till the next quarter. As home loan EMI is mostly linked to the repo rate, it will take some more time for home loan borrowers to see their EMIs falling.


Cooling inflation gives hope to a rate cut in the first half of next year

Retail inflation remains the primary focus area for the RBI. It was double-digit retail inflation that led to a series of repo rate hikes, which compelled banks to raise home loan interest rates. Of late, there have been signs of inflation cooling down, which have raised the expectation of a repo rate cut in the near future. However, if inflation does not cool down, the possibility of a rate cut may appear distant. “Inflation has again been quite volatile in recent weeks, with perishables (specifically onions and tomatoes), pulses and spices showing quite strong upward momentum. This could push the Q3FY24 CPI inflation average to ~5.6%, in line with the RBI’s forecast,” says a research report from Emkay Global Financial Services.

Though retail inflation fell in the first half of this year and came down to 4.25% in May 2023, it shot up sharply in June to 4.81% and in July to 7.44%. So, unless there is a concrete sign of durable reduction in inflation, the RBI is unlikely to go for a repo rate cut. The possibility of any rate cut in the next Monetary Policy Committee meeting also appears remote.

Banks will take time to come out current liquidity issues

The amount of funds banks need to borrow from the interbank market or from the central bank stood at Rs 1.74 lakh crore ($20.90 billion) on November 21, according to RBI data. When the short-term borrowing needs of banks are higher, it pushes up the short-term interest rates and banks are compelled to raise their deposit rates as well. In a sign of the liquidity crunch, overnight money market rates have been moving around the RBI’s marginal standing facility rate of 6.75%. For instance, on December 4, the weighted average rate for call money stood at 6.75%, while for market repo, it stood at 6.77%. This is one of the primary reasons why lenders have to pay a much higher cost of funds in the short run; hence, a cut in interest rate looks unlikely in the near future.

What should home loan borrowers do now?

As global inflation cools down and liquidity conditions become comfortable, the RBI might go for a repo rate reduction. However, not all borrowers will be in a position to benefit from the fall in home loan interest rate.

Here is what you can do to make sure that you are in the best position to save your hard-earned money from going toward a home loan EMI:

Make sure your home loan is from a bank is under EBLR regime

Borrowers who have home loans under the EBLR (external benchmark linked lending rate) regime will get the quickest benefit of a reduction in home loan interest rate.

Within this, the loans linked to the repo rate will see a benefit flowing in directly: the fall in interest rate will be equal to the cut in repo rate

.

If you have a home loan from a bank, you should first check if the loan is running under the EBLR regime. If it is not, request your bank to change your home loan to EBLR. The bank will charge a nominal fee and allow the shift.

For instance, SBI charges a one-time switchover fee of Rs 1,000 and applicable tax for this.

If you have taken a home loan from an NBFC, this option is not for you.

Best time for home loan borrowers to go for an interest rate revision

If you have a home loan with an NBFC, check how much interest your lender is charging you. Compare this rate with the one that your lender is offering to a new home loan borrower. If there is a difference of 0.5% or more, you need to act. Most lenders allow their borrowers to revise their ROI on home loans.

If your lender is not reducing rate, go for refinance

If your lender is offering a much lower rate to new borrowers but is not allowing you to switch your home loan to a lower interest rate, you have to start exploring refinance options.

Check the interest rates offered by various lenders and check the feasibility of transferring your home loan to a lender offering the lowest interest rate. You need to be cautious about the cost of transfer and the net benefit when going for such a transfer.

When you find a new lender offering an interest rate that is lower by 0.5% or more, transferring the loan will be advantageous even if it attracts a charge. Many lenders offer a waiver or discount on various charges, including processing fee, for people shifting loans to their institution. Finding such a lender will further reduce your cost of transfer.

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