The rupee’s sharp fall against the US dollar may soon begin affecting something far beyond foreign exchange markets, home loan EMIs.
After slipping close to the Rs 97-per-dollar mark and becoming one of Asia’s weakest-performing currencies this year, concerns are now rising that the Reserve Bank of India () may eventually be forced to raise interest rates to control inflation and stabilise the currency.
If that happens, home loans could become costlier for both existing and new borrowers.
since the Iran war began, mainly because of rising crude oil prices, foreign investor outflows and global uncertainty.
India imports nearly 85% of its crude oil requirements. So when global oil prices rise sharply, India needs more dollars to pay for imports, putting pressure on the rupee.
The ongoing conflict in West Asia has already pushed crude oil prices sharply higher, worsening concerns around inflation, India’s import bill and external finances.
Trade Minister Piyush Goyal on Thursday said the government was considering several steps to deal with the rupee’s depreciation.
“We are monitoring the situation … and several steps are under consideration. The situation is globally quite challenging,” Goyal said.
At first glance, the rupee and home loans may seem unrelated. But economists say the connection comes through inflation and interest rates.
That means that crude oil becomes costlier, fuel prices rise, , and prices of goods and services begin climbing.
This creates inflationary pressure on the economy.
If inflation remains elevated for a prolonged period, the RBI may have to increase repo rates — the rate at which it lends money to banks — to cool demand and stabilise prices.
When repo rates rise, banks usually increase lending rates too. That pushes up EMIs on floating-rate home loans.
Simply put: Weak rupee higher imported inflation possible RBI rate hikes costlier home loans.
Economists at Standard Chartered believe the RBI may soon begin raising rates because of growing inflation risks linked to crude oil and currency weakness.
In a note on Thursday, Standard Chartered economists Anubhuti Sahay and Saurav Anand said the RBI could begin hiking rates as early as June.
“We expect 50 bps of hikes, split equally between June and August. However, if there is no hike in June, the could be hiked by 50 bps in August,” they said.
The RBI’s next monetary policy decision is scheduled for June 5.
The economists also said India may see another 25-50 basis points of hikes through the end of the financial year if inflation remains high due to expensive commodities and rupee weakness.
Interestingly, Standard Chartered had earlier expected the RBI to keep rates unchanged this financial year. But the sharp rise in oil prices and the rupee’s fall have changed that outlook.
India is the world’s third-largest importer and consumer of crude oil.
When oil prices rise sharply:
India has already started increasing petrol and diesel prices after state-run oil companies came under pressure from rising crude oil costs.
The government has also called for austerity measures to conserve fuel and foreign exchange reserves.
According to Standard Chartered, India’s retail inflation could rise to 4.9% this fiscal year, higher than its earlier estimate of 4.7%.
The RBI aims to keep inflation around 4%, within a tolerance band of 2%-6%.
For people planning to buy homes, the situation could become more difficult if interest rates rise again.
A higher repo rate usually means:
Even existing borrowers with floating-rate loans could see their monthly EMIs increase or loan tenures extend further.
For example:
a 25 basis point increase in home loan rates can increase EMIs noticeably over a 20-year loan period,while repeated hikes can significantly increase the total interest paid over time.
This could especially affect first-time homebuyers already dealing with:
high property prices,rising construction costs,and expensive urban housing markets.
The RBI now faces a complicated challenge.
On one side, raising rates could help stabilise inflation and support the rupee.
On the other, higher interest rates could slow borrowing, investment and economic growth.
Economists say much will depend on crude oil prices, the duration of the West Asia conflict, foreign investor flows, and whether the rupee stabilises in coming weeks.
For now, the message from markets is becoming clearer: the rupee’s fall is no longer just a currency story. It could soon start affecting household budgets, home loan EMIs and the overall cost of owning a home in India.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)