Investment banking and financial services giant Morgan Stanley had on July 2, 2023 predicted that India’s retail inflation will reach 6.2 per cent by the end of September 2023, driven by rising food inflation.
This could lead to the Reserve Bank of India (RBI) raising repo rates. As a result, loan rates, such as personal loans, car loans, and home loan, including equated monthly instalments (EMIs), are expected to rise. Let’s explore some strategies that you can use to cope with the potential inflationary pressure, and manage loan burdens effectively.
Higher Inflation Expectations
Investment banking and financial services major Morgan Stanley has forecast a jump in India’s retail inflation to 6.2 per cent in the quarter ending September 2023, citing rising food inflation.
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“The upside is primarily being driven by increase in food inflation, mainly reflecting higher inflation in vegetables and somewhat in pulses and cereals. We expect core inflation to remain unchanged and largely range bound around 5-5.2 per cent,” the report said.
Credit rating agency Crisil has also highlighted in a report that renewed pressure on food inflation had contributed to a higher retail inflation rate in July 2023. Now, the recent interest rate hike by the US Federal Reserve is likely to influence RBI’s interest rate outlook.
So, to tackle potential increase in loan rate, borrowers can consider several strategies.
Coping Strategies For Borrowers
Effective Debt Management: Consider debt consolidation by merging multiple loans into a single personal loan to simplify repayment and potentially lower the rate of interest.
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For borrowers with high-interest debts, such as credit card loans, prioritising repayment of higher interest debts will reduce the financial stress and allow breathing space to focus on lower interest debts.
Refinancing: One could also engage with one’s lender to understand the impact of rate hikes and the increase in loan EMIs. Accordingly, one could then refinance the loan with the existing lender to adjust the loan tenure, interest rates and EMI payments according to the interest rate regime.
The current high rates due to global pressures are not likely to last over a long tenure as the macroeconomic fundamentals are strong. So, it is better that you refinance your loan, if needed, with your existing lender rather than approach a new lender, as the associated charges, such as application processing and so on would be relatively expensive.
Balance Transfer: Explore transferring your home loan to another lender, for instance non-banking financial companies (NBFCs) to banks offering lower rates of interest to reduce the overall loan cost.
However, carefully assess the benefits and disadvantages, considering the total repayment amount, charges, and savings. Evaluate the benefits of fixed and floating interest rates when transferring home loans. If you plan to transfer the loan, check for prepayment charges from the existing bank and foreclosure charges at the new lender where you considering shifting to.
The RBI has ruled that no prepayment penalty can be charged for floating rate loans.
In short, with higher inflation likely on the horizon, borrowers must be proactive in managing their loan burdens by adopting appropriate strategies.
