The Reserve Bank of India (RBI) has increased the repo rate by 35 basis points to 6.25 per cent in its December Monetary Policy Committee (MPC) meeting. So far in FY23, the MPC has increased the repo rate by 190 bps: 40 bps in May and 50 bps each in June, August, and September. The latest hike of repo rates will impact existing and new retail loan borrowers with floating interest rates.
The interest rates for fixed-rate loans, such as personal loans, remain the same throughout the tenure. However, some retail loans, including home loans and auto loans are linked to an external benchmark set by the Reserve Bank of India. Most of the banks and non-banking financial companies (NBFCs) have linked their lending rates to the repo rate fixed by the central bank. So, when the repo rate goes up, the repo rate linked lending rate (RLLR) of banks also increases. The Repo rate is the rate at which commercial banks borrow money from the Reserve Bank of India. If the central bank increases the repo rate, the cost of borrowing for retail and other loans by the banks, also rises.