What does interest rate rise mean for mortgages and savings?

RBI hikes repo rate by 25 basis points to 6.50% maintains neutral stance

The decision of the Reserve Bank of India (RBI) to increase the repo and reverse repo rates by 25 basis points each will make home loan costlier and negatively impact buyer sentiment at a time the industry is struggling to recover from sluggish sales, the real estate industry said on Wednesday.

The repo rate is the rate at which the central bank of the country lends funds to the commercial banks.

But it also said inflation - now running at 2.4 per cent - was set to rise slightly higher than it had predicted in May's set of forecasts after recent falls in the value of the pound and higher energy prices.

He said: "We believe that the odds still favour the Bank of England lifting interest rate from 0.50% to 0.75% on Thursday after the August MPC meeting - most likely following a split vote".

The first hike in the current cycle of rising interest rate trajectory was in June when the repo rate was increased from 6 per cent to 6.25 per cent. "The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis", it said.

This is the first time since October 2013 that the RBI has hiked its lending rate at two consecutive meetings. Nearly all (96%) of new mortgage loans are offered on a fixed rate, usually for the first two or five years.

RBI Governor Urjit Patel said the RBI survey of households reported an uptick of 20 basis points in inflation expectations.

Image copyright Reuters Image caption The Bank of England is expected to raise interest rates to 0.75% How has the economy performed? Five out of six committee members had voted for an increase in rate.

The one reason that may have prompted the RBI to hike interest rates is the core inflation, which has been on a upsurge.

The Bank said retail sales had surged by 2.1 per cent in the second quarter, boosted by the recent sunny weather.

It also expected Britain's economy would grow by 1.4 percent this year, unchanged from its forecast in May, but it nudged up its 2019 forecast to 1.8 percent from 1.7 percent. "Given this, we have to ensure that we run a tight ship on the risks that we control to maximize the chances of ensuring macro-economic stability and continuing with the growth profile of 7-7.5 percent".

Alex Day asks: Will this affect the interest rate on student loans?

Adhil Shetty, CEO, BankBazaar.com: "In June, several leading banks including SBI had increased their MCLR".

Given that a rate hike is nearly a foregone conclusion, other parts of the MPC's decisions, and the minutes of the meeting are likely to provide more intrigue.

However, those with a variable rate mortgage will pay more on their repayments each month.

EUR/GBP at 0.90 gives a GBP/EUR exchange rate of 1.11.

VK Sharma, Head Private Client Group & Capital Market Strategy, HDFC Securities: By hiking rates by another 0.25 percentage points the central bank is now fully ahead of the curve.

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