The Reserve Bank of India (RBI) governor on Wednesday announced a surprise 40 basis points (bps) hike in key policy rates. The Cash Reserve Ratio (CRR) has also been increased by 50 basis points, putting further upward pressure on interest rates.
Not surprisingly, banks have announced interest rate hikes in their repo rate linked home loans in line with the latest RBI announcement. Among those that have increased their external benchmark linked loan interest rates are
and .
ICICI Bank RLLR loan interest rate
Soon after the announcement, ICICI Bank in its website stated: “the ICICI Bank External Benchmark Lending Rate” (I-EBLR) is referenced to RBI Policy Repo Rate with a mark-up over Repo Rate. I-EBLR is 8.10% p.a.p.m. effective May 4, 2022.”
Bank of Baroda RLLR loan interest rate
With effect from May 5, 2022, the relevant Baroda Repo Linked Lending Rate BRLLR for retail loans is 6.90 percent. The current RBI Repo Rate: 4.40 percent + Mark-Up-2.50 percent, S.P.0.25 percent, according to the Bank of Baroda website.
What is external benchmark loan?
RBI mandated that from October 1, 2019 all new floating rate personal or retail loans (housing, auto etc.) shall be linked to an external benchmark.
Banks are free to choose from any of the external benchmark mentioned below:
a) RBI’s policy repo rate
b) Government of India3-Months Treasury Bill yield published by the Financial Benchmarks India Pvt Ltd (FBIL)
c) Government of India 6-Months Treasury Bill yield published by the FBIL
d) Any other benchmark market interest rate published by the FBIL
To arrive at an interest rate that will be charged on the loans, first margin is added to the repo rate with which we arrive at repo rate linked lending rate (RLLR) and then risk premium is added to the RLLR to arrive at the interest rate that will be charged.
What should borrowers do?
More banks are likely to announce rate hikes soon. The 40 bps hike in the repo rate will lead to higher cost of borrowing for both existing and fresh borrowers. The impact would be faster on those planning to avail home loans or any other loans linked to the external benchmark rates, especially the repo rate.
The interest rates for existing borrowers linked to repo rate or any other interest rate benchmarks, both internal as well as external, will remain the same till the next reset date of their loans. The new interest rate on their reset date will be calculated after factoring in the benchmark rate applicable on the reset date and credit spreads. This new interest rate will then remain in force till the next reset dates of their loans, irrespective of any repo rate changes by the RBI in the interim. The repo rate cut would not impact any loans availed at fixed interest rates.
