RBI raises repo rate to 5.50%, raising loan costs

The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.50% on October 7, a move that could increase borrowing costs for households with floating-rate loans. The timing and size of any change for individual borrowers will depend on their loan terms, lender and rate-reset schedule. The repo rate is the rate at which the RBI lends to commercial banks. When it rises, banks may face higher funding costs and can pass some of that increase on through lending rates. Borrowers whose loans are linked to the repo rate or another external benchmark are most directly exposed. Fixed-rate borrowers are generally insulated during the period their rate remains fixed, while other loans may adjust according to their own benchmarks and reset terms. For affected home-loan borrowers, lenders can respond to a higher rate by increasing the monthly equated instalment, extending the repayment period, or combining both. A longer tenure may ease the immediate monthly burden but can mean paying interest for longer.