Since last year, inflation in India and around the globe has been surging, having reached record-levels . What impact does this rising inflation have? The direct impact of inflation is a general increase in the price of the goods and services you consume. Essentially, it makes things more expensive as it takes more money to buy the same amount of things than before. 

A certain level of inflation is a given, but when the rate of inflation exceeds the government’s target rate significantly and when the wage growth rate does not keep up, a range of problems arise in the economy. And to combat these problems, the government makes certain changes in the monetary policy. But how does any of this impact your personal loan interest rate? Let’s find out.

  • Here’s how the government combats inflation

The government adopts a contractionary monetary policy wherein it seeks to reduce the flow of credit in the economy to reduce spending and demand. A decrease in demand for goods and services will automatically bring down their prices, combating inflation. 

In order to do this, the government ends up raising the interest rates in the country. The Reserve Bank of India (RBI) raises the repo rate, which is the rate at which commercial banks borrow from it. Since May 2022, RBI has increased the repo rate by 250 basis points, with the most recent hike being a 25 basis points increase in February. After this hike, the repo rate stands at 6.5%. 

This is definitely lower than several other economies, such as the US, which has raised its benchmark interest rate by over 400 basis points since 2022. So, while inflation is high in India, compared to many developed economies, it’s still not as out of control.

  • How does a hike in repo rate impact personal loan interest rates?

The repo rate is the interest rate at which commercial banks borrow money from RBI. And then, on the basis of the repo rate, amongst other factors, the commercial banks set their lending rates for consumers for a range of loans, including personal loans

Hence, when it becomes costlier for the lenders to borrow from RBI, it also becomes costlier for consumers to borrow from them. There is a direct impact of a change in the repo rate on the interest rate of personal and other loans. In fact, since the repo rate hike in February this year, several commercial lenders have increased their interest rates by 0.5% to 2.5%. 

An increase in the personal loan interest means your overall interest outgo on the loan over its tenure also increases. Hence, in the light of a rising interest rate environment, it is all the more essential to carefully assess your personal loan Equated Monthly Instalment (EMI) amount before you click on the personal loan apply button. You can estimate the EMI by using a personal loan EMI calculator online. This will allow you to see how a higher interest rate impacts your EMI amount as well as the interest cost on the loan so that you can better plan and manage your finances.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.