A possible 25-basis-point increase in the Reserve Bank of India's repo rate could raise borrowing costs for home loan customers, particularly those with floating-rate loans linked to the policy benchmark. The RBI is scheduled to announce its monetary policy decision on Wednesday, October 7, amid concerns over rising inflation, higher crude oil prices and global bond yields. Economists and market participants are watching the decision closely, with a 25-basis-point hike being considered a possibility.

The repo rate currently stands at 5.25%, and a 25-basis-point increase would take it to 5.50%. CA Kinjal Shah, President of the Bombay Chartered Accountants Society, said rising retail inflation, elevated energy costs and global monetary tightening could support such a move. He also stressed the importance of the RBI's guidance on liquidity conditions and the future direction of interest rates, as borrowers and financial markets assess how long tighter monetary conditions could persist.

For home loan borrowers, the effect of a repo rate increase would depend on how lenders transmit the change to their customers. Puja Abhishek Singh, CEO of Manipal Fintech, said the possibility of a 25-basis-point increase was being closely watched. Borrowers with repo-linked loans could see a change in their monthly EMIs, loan tenure or both. The actual adjustment would depend on the lender's policies and the structure of the individual loan.

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The potential impact can be illustrated through a ₹50 lakh home loan taken for 25 years at an interest rate of 7.5%. Based on calculations cited in the report, the monthly EMI at this rate would be around ₹36,950, while the total interest payable over the 300-month tenure would be approximately ₹60.85 lakh. If the interest rate rises by 25 basis points to 7.75%, the estimated EMI would increase to around ₹37,766, resulting in an additional monthly payment of about ₹817 if the loan tenure remains unchanged.

The increase becomes more significant when the total interest cost over the entire loan period is considered. At an interest rate of 7.75%, the total interest payable on the ₹50 lakh loan over 25 years would rise to approximately ₹63.30 lakh. This represents an increase of around ₹2.45 lakh compared with the interest cost at 7.5%. The calculation keeps the loan amount and tenure unchanged and assumes that the entire 25-basis-point increase is passed on through the lending rate.

The example shows how even a relatively small change in interest rates can have a meaningful impact over a long repayment period. However, the actual effect on individual borrowers will vary depending on the lender, loan terms and the manner in which a repo rate change is passed through. Borrowers with floating-rate, repo-linked loans may therefore need to assess whether a rate change would result in a higher EMI, a longer repayment period or both. The RBI's policy decision and its guidance on inflation and future interest rates will provide further clarity on borrowing costs.

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