RBI hikes repo rate after nearly 4 years: Are your personal loan EMIs set to rise?

The RBI has raised the repo rate to 5.5%, bringing borrowing costs back into focus. But what does the move mean for people repaying a personal loan?

In Short

• Floating-rate personal loan EMIs may rise if lenders pass on hike
• Borrowers with floating loans face higher repayment pressure
• Check loan type and compare rates before taking new personal loan

The Reserve Bank of India (RBI) has raised the repo rate by 25 basis points to 5.50%, making borrowing costs a key concern for people with floating-rate loans. But will your personal loan EMI also go up?

The rate hike, the first since February 2023, comes as the central bank flags rising inflation pressures and a challenging global economic environment. The RBI has also changed its policy stance to “calibrated tightening”, signalling that it is no longer considering rate cuts in the near term.

For personal loan borrowers, the impact will depend largely on whether the loan is linked to an external benchmark and how the lender passes on the rate change.

WILL YOUR PERSONAL LOAN EMI INCREASE?

A repo rate hike increases the cost at which banks and other financial institutions borrow funds. When the cost of funds rises, lenders may increase lending rates, which can make new loans more expensive.

For existing borrowers, however, the impact is not always immediate or the same for everyone. It depends on the terms of the loan, the lender's benchmark and whether the interest rate is fixed or floating.

Borrowers with floating-rate personal loans could see their interest rates, EMIs or loan tenures change if the lender passes on the increase.

Kumar Binit, CEO, airpay money, said the impact could be felt across household budgets, particularly with festive spending picking up.

“A 25 basis point hike to 5.50%, right ahead of Diwali, will be felt across household budgets. Floating-rate EMIs on home loans, personal loans, and auto loans will rise at a time when festive spending is already at its peak,” he said.

If a lender increases the interest rate on a floating-rate personal loan, borrowers could face a higher monthly EMI if the loan tenure remains unchanged.

Alternatively, the lender may keep the EMI broadly unchanged but extend the repayment period. In that case, the borrower could end up paying more interest over the life of the loan.

The exact impact will depend on the outstanding loan amount, remaining tenure, existing interest rate and the extent to which the lender passes on the RBI's rate hike.

For borrowers planning to take a personal loan, the change could mean slightly higher borrowing costs compared with the rates available before the repo rate hike.

LENDERS MAY ALSO RAISE DEPOSIT RATES

The impact of a higher repo rate is not limited to borrowers.

Banks could also increase fixed deposit (FD) rates as they adjust to the new interest-rate environment. This could benefit savers looking for relatively stable returns.

“The silver lining is for depositors - banks are likely to revise FD rates upward in the coming weeks, making this a favourable environment for parking festive bonuses and seasonal savings,” Binit said.

Why personal loan borrowers need to watch the next few months

The latest move is important not just because of the 25-basis-point hike, but also because of the RBI's change in policy stance.

Puja Abhishek Singh, CEO, Manipal Fintech, said the rate hike was widely expected and reflected the RBI's focus on price stability amid global economic uncertainty.

“With geopolitical developments in the Middle East influencing energy prices and the inflation outlook, the policy decision highlights the need for a balanced approach to managing inflation while supporting economic growth,” she said.

For lenders, the immediate impact is likely to be a modest increase in the cost of funds. That could eventually feed into lending rates, depending on how banks and financial institutions respond.

Singh added that borrowers with repo-linked loans may see changes in their EMIs or loan tenures, while deposit rates could also rise as banks adjust to the new rate environment.

BORROWERS COULD FACE HIGHER REPAYMENT PRESSURE

A higher EMI may not look significant on a monthly basis, but it can add to the financial burden for borrowers who already have several loans or are managing higher household expenses.

Siddharth Agarwal, Founder & Managing Director, Mobicule Technologies, said the rate hike could quickly affect borrowers with floating-rate loans.

“A rate hike by 25 bps after an extended pause will quickly reach borrowers on floating-rate loans, either through higher EMIs or longer loan tenures. For households and small businesses already managing rising costs, this adds meaningful pressure,” he said.

He also said lenders should communicate any changes to borrowers before they take effect and consider measures such as tenure extensions or restructuring where appropriate.

WHAT SHOULD PERSONAL LOAN BORROWERS DO?

If you already have a personal loan, check whether your interest rate is fixed or floating and understand the benchmark to which it is linked.

It is also worth checking whether your lender changes the EMI or the loan tenure when interest rates move. If the EMI rises, borrowers should review their monthly budget and avoid taking on additional high-cost debt unless necessary.

For those planning to take a new personal loan, comparing interest rates and other charges across lenders becomes even more important in a rising-rate environment.

The RBI's latest move does not necessarily mean that every personal loan EMI will immediately rise by the same amount. But with the policy stance now shifting towards calibrated tightening, borrowers should be prepared for the possibility of higher borrowing costs if rates remain elevated.

- Ends