RBI increases lending rate, EMIs may go up

Mumbai: Home, auto and personal loans may get costlier as the Reserve Bank of India (RBI) on Wednesday hiked the policy repo rate by 25 basis points to 6.25 per cent for the first time in last four years to curb rising inflationary pressures.

Loan EMIs  may increase if the banks decide to pass on the hike. The repo rate is the rate at which the RBI lends short-term money to banks. The central bank has also increased the reverse repo rate — the rate at which the RBI borrows from commercial banks — to 6 per cent from 5.75 per cent.

This is the first increase in interest rate since January 2014. Since then, the RBI has slashed rates on six occasions.

After the hike, financial market participants said the latest RBI move is the beginning of a rate hike cycle and they expect another 25 basis point hike by the end of this year.

Amid fears of possible increase in home loan EMIs, there was some good news for the small or affordable home buyers as the RBI increased the housing loan limits for them and the government decided to use surplus land of sick PSUs for construction of affordable houses.

President Ram Nath Kovind also gave his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, that provides significant relief to home buyers by recognising their status as financial creditors while dealing with errant builder.

While hiking the repo rate, the six-member monetary policy committee (MPC)  unanimously retained its growth projection for FY19 at 7.4 per cent but revised upwards its inflation forecast due to steep rise in global crude oil prices.

Since its last policy meeting in early April, the MPC noted that the price of Indian basket of crude has surged from $66 per barrel to $74 per barrel. This along with an increase in other global commodity prices and recent global financial market developments has resulted in firming up of input cost pressures.

“The resulting pick-up in the momentum of inflation excluding food, fuel and HRA has imparted persistence into higher CPI (Consumer Price Inded) projections for 2018-19,” RBI said in the policy.

“Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook — both on the upside and the downside,” it said.

Offering relief to affordable home buyers, the RBI raised the loan limits under priority sector lending (PSL), the government deciding to use surplus land of sick PSUs for construction of such dwelling units. Loans given under PSL are less expansive than those provide by the banks in their ordinary course.

In a statement, the RBI said that it has been decided to revise the housing loan limits for PSL eligibility from '28 lakh to '35 lakh in metropolitan centres and from '20 lakh to '25 lakh in other centres.    

In another development, President Ram Nath Kovind promulgated an ordinance recognising home-buyers as financial creditors, thus giving them greater say in insolvency of defaulting builders.

Mr Kovind gave his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, that provides significant relief to home buyers by recognising their status as financial creditors.

“This would give them due representation in the committee of creditors and make them an integral part of the decision-making process,” a release said.

Home buyers would be able to invoke Section 7 of the IBC against errant developers. Section 7 allows financial creditors to file application seeking insolvency resolution process. The move also comes at a time when many home buyers are facing hardships on account of delayed and incomplete real estate projects.

Earlier in the day, the Union Cabinet approved revised guidelines on time-bound closure of sick and loss making central public sector enterprises and disposal of their movable and immovable assets.

The guidelines accord first priority for utilisation of available land parcels of public sector enterprises under closure for affordable housing as per the relevant guidelines of ministry of housing and urban affairs.