For retail and corporate borrowers, equated monthly instalments (EMIs) will climb after the Reserve Bank of India (RBI) on Friday raised the repo rate by 50 basis points (bps) to 5.40%.

Corporate borrowers will bear less of the hike than the retail customers who will see monthly payout on their loans shoot up. A worried RBI has raised the repo rate by 140 bps in this tightening cycle, which began on 4 May with a 40 bps hike and was then followed up with a 50-bps increase in June. 

There are signs that the central bank will carry out more rate hikes as part of its ammunition to temper inflation.

“The rate increases from May has not been fully passed on to our borrowers. This will start gathering momentum from this quarter. Corporates will have lesser rate increases but for the retail customers, the hike will be sharper,” said the chief executive of a mid-sized public sector bank.

Home loan rates for most banks had fallen to decadal lows. While the interest rate was at 6.65% for banks like Kotak Mahindra Bank and Punjab & Sind Bank, for others such as ICICI Bank and State Bank of India (SBI) it was at a low of 6.70%. The decadal low loan rates coincided with the pandemic when the banking system was flushed with funds while demand for credit had reached the nadir.

The liquidity within the system, created by the RBI to soften the impact of the coronavirus pandemic, has tightened to some extent following the rate hikes. With credit growth beginning to outpace deposit flows, there will be a further tightening. This will push deposit rates up, implying that the cost of funds for banks will rise. 

RBI Governor Shaktikanta Das has indicated in the bi-monthly monetary policy on Friday that banks are likely to pass on impact of repo rate hike to deposit rates. This will have a spiralling effect on the lending rates.

Ahead of the monetary policy, mortgage lender HDFC announced a 25-bps increase in its benchmark lending rate, its fifth hike in two months. Other banks will also elevate their home loan rates as cost of funds rise for them.  

The real estate sector may get impacted, particularly in the affordable housing segment.

“The increase in repo rates will have an effect on interest rates as well as homebuyer attitude. This year has seen a steady increase in home sales but the ongoing climb in mortgage rates may overwhelm a buyer,” said House of Hiranandani chairman and managing director Surendra Hiranandani.