Expectations of an RBI interest rate hike have strengthened in recent weeks amid a sharp rise in crude oil prices and continued geopolitical uncertainty worldwide. Brent crude has crossed the $100-per-barrel mark, raising concerns over inflation and its potential impact on the Indian economy.
A rise in the repo rate could directly affect borrowers, particularly those with floating-rate home loans and other variable-rate borrowings. Banks may increase lending rates following an RBI hike, potentially pushing up monthly EMIs or extending the repayment period for existing loans. New borrowers could also face higher interest rates if lending rates rise.
When could the RBI hike interest rates?
A Moneycontrol poll of nine economists and treasury heads found that most experts expect the RBI to raise interest rates by December. Some believe the central bank could announce an initial 25-basis-point hike at its October policy review, followed by another 25-basis-point increase in February 2027. If both hikes take place, the repo rate could rise to 5.75%.
ICRA Chief Economist Aditi Nayar said elevated crude prices ahead of the next Monetary Policy Committee meeting, along with any increase in retail petrol and diesel prices, could add to inflationary pressures. She noted that such developments could increase the possibility of a rate hike in October rather than December.
How could a repo rate hike affect your loan?
An increase in the RBI’s repo rate can push up banks’ lending rates, which may make floating-rate loans more expensive. Existing home-loan borrowers could see their EMIs rise or their loan tenure extended, depending on how their lender adjusts the interest rate.
Interest rates on new home loans and other floating-rate loans could also increase. Borrowers planning to purchase a house or take a large loan in the coming months may therefore need to factor in the possibility of higher borrowing costs. The actual impact on an EMI will depend on factors such as the lender’s interest rate, outstanding principal and remaining repayment tenure.
Rising inflation adds to RBI’s concerns
Inflation is another factor that could influence the RBI’s interest-rate decision. According to the figures cited in the report, CPI inflation rose to 4.82% in August from 4.45% in July, with higher food and fuel costs contributing to the increase.
Inflation remains within the RBI’s 2-6% target range, but sustained increases in crude oil prices could create additional pressure. If expensive crude leads to higher petrol and diesel prices, the impact could potentially spread to transportation and the prices of other goods and services.
SBI economists have estimated that CPI inflation could cross 6.5% before easing below 6% by early 2027. They also expect crude oil prices to remain above $100 per barrel in the near term, keeping inflation risks in focus for the RBI.