Car and two-wheeler loan EMIs set to rise. Here is why

If you are planning to buy a new car or a two-wheeler, get ready to shell out more every month to bring home a new vehicle. Auto loan EMI rates will be hiked by banks soon after the Reserve Bank of India (RBI) decided to increase the key interest rate by 50 basis points on Wednesday, June 8. This is the second time that the RBI has increased repo rate, or lending rate for loans on vehicles as well as homes and other purposes, in the last five weeks.

Shaktikanta Das, Governor of the Reserve Bank of India, said that the six-member rate-setting panel of the central bank voted unanimously to raise the lending rate of the repurchase (repo) rate by 50 basis points to 4.90 percent. In May, RBI had hiked the repo rate by 40 basis points.

"Inflation has steeply increased beyond the upper tolerance level. Upside risks to inflation as highlighted in last policy meetings have materialised earlier than expected," said the Governor of RBI.

The rise in lending rates could impact the auto industry which is still struggling to cope with a downslide along with challenges like supply chain issues, semiconductor crisis. Recently, the Centre also increased the third-party motor insurance, which made buying new vehicles a bit more expensive affair. The second rate hike will also add to the problems for auto manufacturers as well as dealers.

During the last hike announced by RBI, the Federation of Automobile Dealers Associations (FADA) had reacted saying the move is likely to scuttle the growth engine in the auto industry. FADA represents over 15,000 automobile dealers having 26,500 dealerships across the country.

RBI has not increased the lending rates during the Covid-19 pandemic days. In fact, the central bank had reduced the repo rate by 250 basis points since February, 2019. This included a reduction of 115 basis points between March and May 2020 to deal with financial crisis during the Covid-19 pandemic.