MUMBAI: The latest repo rate-hike cycle is expected to be shallower than the last, but it could still squeeze household finances, as higher equated monthly instalments (EMIs) are coinciding with elevated living costs and potentially slower wage growth.
The policy backdrop offers little relief. Minutes of the Reserve Bank of India’s Monetary Policy Committee meeting, held between October 5 and 7, indicate that further rate rises or a pause are the only near-term options. Members are increasingly concerned that inflation is spreading beyond food and fuel. The panel raised the repo rate by 25 basis points (bps) to 5.50 per cent. At least two more increases are likely.
The cumulative tightening, according to some economists, is expected to be limited to 50-75 bps. This would be considerably smaller than the 250 bps tightening of 2022, when the repo rate climbed from a low of 4 per cent. But this time, because the rate-hike cycle is starting from a higher base, borrowers could still face heavier repayments.
The economic backdrop also differs from the post-Covid period, when reduced spending on commuting, eating out and holidays helped households build savings and cushion the impact of higher rates. This time, fuel and food inflation are keeping expenses elevated, while income growth remains uncertain. Persistently high crude oil prices amid geopolitical tensions could squeeze corporate profitability and curb wage growth. Meanwhile, inflation would further erode purchasing power, leaving households with less room to absorb higher EMIs.
For home loan borrowers, the choice between higher EMIs and longer tenures carries its own cost. Adhil Shetty, chief executive of BankBazaar, calculates that a ₹40 lakh, 20-year loan at 8 per cent would move to 8.25 per cent if a 25 bps rise were passed on in full. Paying the higher EMI would add about ₹1.5 lakh to total interest. Keeping the EMI unchanged would extend repayment by around 12 months and add roughly ₹4 lakh in interest.
“The current rate-hike cycle will test how sensitive Indian households have become to interest rates, with higher EMIs potentially forcing borrowers to cut discretionary spending and weighing on demand,” said a senior banker, who requested anonymity. The banker noted that the post-Covid tightening followed an exceptionally low-rate regime and coincided with rising household savings and pentup demand, whereas this cycle is unfolding in a more normalised environment, “making it worth examining the impact on consumption”.
Underscoring that the circumstances this time differ from the post-Covid period, another senior banker said: “Rate hikes have a more visible impact on retail borrowers, particularly home loan customers, who are likely to opt for longer tenures to keep EMIs manageable. For MSMEs, especially those operating on thin margins, higher borrowing costs would add to the interest burden, although the impact may remain manageable for most businesses.”
A senior public sector bank executive, however, cautioned against assuming that borrowers would necessarily feel a greater pinch than during the post-Covid-era tightening, when household incomes were also under pressure.
“Rate hikes will have an impact on retail borrowers and MSME borrowers. However, it is difficult to say whether they will pinch borrowers more this time than during the immediate post-Covid period. That time people also had lower incomes, and rising interest rates added to their difficulties,” the executive said, adding, “higher repayments could put pressure on overleveraged borrowers.”
Borrowers also have limited scope to manage higher rates by extending repayment periods or increasing monthly instalments. “This time, it does not necessarily mean that customers will opt for longer tenures because there is a limit to how much tenures can be extended. Similarly, overleveraged customers also have a limit to how much they can increase their EMIs,” the executive said.
The strain on individual borrowers may not, however, translate into a sharp slowdown in overall consumption. The senior banker said the impact on aggregate demand could be limited because Indian consumption is usually less sensitive to interest rate changes. While higher rates would raise repayment burdens for households and borrowing costs for businesses, the extent to which these translate into weaker consumption and investment remains uncertain.
For Gaura Sen Gupta, chief economist at IDFC First Bank, the bigger risk lies not in mortgage rates themselves but in the outlook for household incomes. “More than the increase in mortgage rates, the bigger concern is household income growth. If crude oil prices remain elevated for longer, corporate profitability could come under pressure, potentially slowing employee expenditure growth. At the same time, higher inflation would erode real income growth. A slowdown in real wage growth could have a more significant impact on household consumption than the increase in borrowing costs alone,” she said.
Sen Gupta expects the current tightening cycle to be shallower because it is starting from a higher base. She expects the repo rate to peak at around 6-6.25 per cent, with the cumulative increase remaining smaller than in the previous cycle, when the rate reached 6.5 per cent. She cautioned against assuming that the current cycle would necessarily have a disproportionately severe impact on borrowers.
Madan Sabnavis, chief economist at Bank of Baroda, also expects the cumulative increase to be limited compared with the previous cycle.
“During Covid, interest rates had fallen to historic lows, with the repo rate coming down to around 4 per cent. When rates were subsequently raised to more normal levels, the increase appeared much sharper. We are unlikely to see a similar scale of increase in the current cycle. Even at the extreme, the cumulative hike may be limited to 50-75 basis points, with the repo rate potentially reaching 6.5 per cent. If inflation is running at 5-6 per cent, the real increase in borrowing costs is considerably lower than the nominal increase might suggest,” he said.
Source: Business Standard
