Part-prepaying in vogue to counter interest rate rise

In only a month, your food bill is likely to have taken a major hit.

With the rate of rise in vegetable prices up from 78.4 per cent in October to 95.2 per cent in November, household budgets are under pressure.

Things could get worse.

Reserve Bank of India Governor Raghuram Rajan said last week that the central bank was not comfortable with inflation inflation levels.

So, it seems likely that the repo rate, at which RBI lends to banks, would be again raised.

“With inflationary figures continuing to surprise on the upside despite tepid growth, we believe RBI is left with no choice but to address the demand-supply mismatch, by hiking the repo rate by 25 basis points to eight per cent coupled with a hike in the Marginal Standing Facility of 25 bps in this week’s (review) meeting,” said Upasna Bhardwaj, economist at ING Vysya Bank.

And, if RBI does so, banks are most likely to follow.

“This time, most banks might raise their lending rates after the central bank does so, as most of them skipped hiking their rates after RBI did so last time or before that. Banks might not absorb the cost this time,” said a senior public sector banker.

"Most banks have stuck to small increases in lending rates all of this year, of 10-20 bps.

So, it could be a good idea to try reducing the interest burden on your loan payments.

Banks, typically, increase the equated monthly instalment or tenure when interest rates go up.

To keep the same EMI and tenure, you could try to part-prepay the loan.

“Ideally, one should create a fund which would help during contingency and for such prepayments through equities, so that you earn some profit,” says Kartik Jhaveri of Transcend Consulting.

"He feels a rise of 25 bps might not be a huge burden.

However, some would certainly feel the pinch, especially with high inflation reducing the surplus.

As we are nearing the financial year-end, one way out could be to use all the money you get from reimbursements or the Leave Travel Allowance (if you have not used it) to prepay your loans and lower the burden.

Or, use any other windfall to do so, say financial planners.

In case you are left with a decent surplus every month, you could see if it is possible to increase your monthly loan outgo, to lower your dues and the loan tenure.

However, you should be sure of being able to sustain it till the loan is repaid.