RBI raises rate, loans get costlier

RBI warned that weaker monsoon rainfall, geopolitical tensions, elevated commodity prices and trade frictions could weigh on inflation and growth

With the Reserve Bank of India (RBI) raising the repo rate by 25 basis points to 5.50 per cent, its first rate hike since February 2023, on Wednesday, home loans, vehicle loans and corporate loans are set to become more expensive, and EMIs for existing borrowers are going up.

Announcing the hike, the central bank cited higher global food and energy prices, financial market volatility, tighter global financial conditions, and a challenging global economic environment as reasons for the decision. It also warned that weaker monsoon rainfall, geopolitical tensions, elevated commodity prices and trade frictions could weigh on inflation and growth.

The RBI Governor Sanjay Malhotra announced the conclusion of the three-day meeting of the Monetary Policy Committee (MPC). The policy repo rate, cut to 5.25 per cent in December 2025, was held at the next four MPC meetings. The MPC changed its stance to ‘calibrated tightening’ from ‘neutral’ and also underscored that a rate cut is unlikely in the near term given the current conditions.

A repo rate hike does not automatically mean every home loan EMI will increase by the same amount. However, banks and housing finance companies could pass on higher borrowing costs to customers, particularly those with floating-rate loans. For instance, on an Rs 50 lakh home loan with a 20-year tenure, a 25-basis-point increase in the interest rate could push the monthly EMI up by roughly Rs 780, depending on the lender and the existing interest rate.

Borrowers may face two choices when rates rise: pay a higher EMI or allow the loan tenure to increase while keeping the EMI broadly unchanged. The impact will depend on the loan’s outstanding principal, remaining tenure, interest rate and the lender’s reset mechanism.

The biggest impact will be on borrowers whose loans are linked to an external benchmark such as the repo rate. The impact is not limited to home loans. For households, the immediate impact will be felt most clearly by borrowers with floating-rate home loans and other loans linked to external benchmarks. For savers, the picture could be more positive.

With the decision, India has joined major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation, squeeze purchasing power and weigh on currencies. Compounding the price pressures is weak rains linked to El Niño.

Food-price pressures have also broadened, with the central bank flagging sharp increases in sugar and onion prices and warning of early signs that inflation is becoming more widespread.  Malhotra flagged risks to India’s inflation and rural demand outlook from deficient monsoon conditions and a strong El Niño, while noting that food price pressures are becoming broader.

The RBI Governor said the southwest monsoon has been deficient and uneven. Although Kharif sowing remained somewhat above normal, it was marginally lower than last year. Looking ahead, Malhotra warned that the weak southwest monsoon combined with strong El Niño conditions could affect the upcoming Rabi season and rural demand. Consumer-price inflation rose to 4.82 per cent in August - above the RBI’s 4 per cent medium-term target for a third consecutive month, while core inflation accelerated to 4.2 per cent.

The RBI now expects headline inflation to average 5.2 per cent in the 2026-27 financial year, with inflation projected to rise to 6.0 per cent in the third quarter and 5.7 per cent in the fourth quarter. “There are also early signs of inflation becoming generalised,” he said, citing a rise in core inflation and a larger share of the consumer price index basket recording elevated price increases.

At the same time, the RBI raised its economic growth forecast for 2026-27 by 40 basis points to 7.1 per cent, after the economy expanded 7.8 per cent in the first quarter. “Taking all these factors into consideration, real GDP growth for 2026-27 is projected at 7.1 per cent; Q2 at 7.2 per cent; Q3 at 6.9 per cent; and Q4 at 6.8 per cent,” Malhotra said. The Central Bank also said GDP growth for Q1:2027-28 is projected at 7.1 per cent and that the risks are evenly balanced.