With interest rates on home loans seeing a rebound in recent months, borrowers may have to shell out more on their equated monthly instalments (EMIs) on their marginal cost of funds-based lending rate (MCLR)-linked loans going forward.
The Monetary Policy Committee maintained its neutral stance in its latest policy last week, following which experts said that given the inflation and growth outlook, the Reserve Bank of India (RBI) may keep the key policy rate unchanged before starting to raise them. This could be a dampener for those with EMIs, as MCLR-linked rates are more responsive to such hikes, as seen in the past.
In such a scenario, home loan borrowers must do the math based on their suitability and time horizon before opting for a floating interest rate. Experts said that as of now, fixed rate can be a better option keeping in mind the current and near-term outlook.
Ramnath Pradeep, former chairman and managing director of Corporation Bank, said as the GST and demonetisation impact is over, an uptick in economic activity might lead to a rise in inflation and as we are moving towards the general elections, chances of inflation increasing are higher, which might force monetary policy to be tight. He added: “The interest rates seem to have bottomed out, which increases the chances of them going up. This might lead to a rise in EMIs on MCLR-linked loans going ahead. So, as of now, fixed rate is a better option, as it might insulate borrowers from possible hikes.” He, however, added that borrowers may also go for a scheme where rates are fixed for a certain period and thereafter floating.
Home loan is a long-term decision, therefore, borrowers must do the calculation. In the near-to-medium term, EMIs could rise on possible policy rate hikes by the RBI but in the long term, the rates may move in any direction depending upon how the macro economic indicators unfold.
Abheek Barua, chief economist, HDFC Bank, said: “Currently, if a borrower is taking a view of 2-3 years and wants some comfort in near-term EMIs, the fixed option should be exercised.” The RBI, in its latest policy, had predicted that inflation could firm up in the first half of FY19, which also gives a clear indication of where the rates are headed. On the impact of two more possible rate hikes by the US Federal Reserve in 2018, Barua said there is always some transmissions but these have already been factored in the bond yields, which spiked recently.
On the long-term outlook, he said: “I would be cautious about interest rates in the long run, as rate hike is not a permanent phenomenon. However, going forward, there are enough indications that rates will be headed upwards in the near term, but home loan is a long-term decision. So, any choice between fixed and floating rates should be made based on borrowers’ suitability.” He added that as there are always upcycles or downcycles in the rate regime, in the long run, there won’t be much of a difference between the two.
Interest rates started falling from 2011-12, when the repo rate — the benchmark rate at which the RBI lends to commercial banks — was 8.5 per cent during the October 2011-March 2012 period (currently, at 6 per cent). The repo rate rose between 2009 and 2011 (from 4.75 per cent in April, 2009 to 8.5 per cent in October, 2011). Barua said that the coming 2-3 years might see a hike in rates.
In the money market, 10 year-government bond yield has hardened 70 basis points in the past one year to 7.49 per cent till Thursday, which shows rising borrowing cost for commercial banks, according to data from Bloomberg.
Stating that there would not be any significant rise in inflation, D K Pant, chief economist and senior director (head-public finance), India Ratings, said: “Rates might go up, depending upon what the global commodity prices are, but chances of inflation rate touching 9-9.5 per cent are quite low. Therefore, there won’t be a significant rise in rates.” However, global commodity prices may also go up in the wake of the ongoing US-China trade tension.
Given the outlook, those wanting to migrate from base rate to MCLR can wait as of now as it might take a toll on their EMIs in the near term in the new benchmark. For new borrowers, MCLR is the benchmark as per the RBI directive. The RBI has asked banks to link base rates to the MCLR from April 1, 2018. Therefore, for new borrowers, in the short term, fixed rate is a good option but in the long term, there might not be any major impact on EMIs as the rate cycle may reverse.