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RBI hikes repo rate: Will loans get more expensive?

RBI hikes repo rate: Will loans get more expensive?

The Reserve Bank of India (RBI) on Wednesday hiked repo rate — the rate at which it lends short term money to banks — by 25 basis points to 6.25 per cent. The hike comes after a long gap of four years.

Usually when RBI hikes repo rate, banks typically pass on the burden to customers. It is almost always the State Bank of India (SBI)—the country’s biggest lender—that leads the rate cut cycle with other banks following suit. If the banks do indeed decide to pass on the hike, then home, auto and other loans are set to get costlier.

However, just days ahead of RBI’s monetary policy review, India’s three major banks — SBI, PNB and ICICI Bank — last week already increased benchmark lending rates or MCLR (Marginal Cost of funds based Lending rate) by up to 0.1 per cent, making loans costlier for consumers.

Most home and auto loans are linked to MCLR which means that higher lending rates indicate that the equated monthly instalments (EMIs) on loans will go up.

Banks are yet give any indication whether they are planning to make loans even more expensive, in the backdrop of Wednesday’s hike.

Last week, SBI increased the lending rate by 10 basis points across all tenors up to three years.

Currently, SBI’s overnight and one-month tenors’ MCLR stands at 7.9 per cent as against 7.8 per cent, according to the bank’s website.

The MCLR for a three-year tenor increased to 8.45 per cent from 8.35 per cent earlier.

State-owned Punjab National (PNB), the country’s second largest lender, raised the MCLR for three-year and five-year tenors to 8.55 per cent and 8.7 per cent, respectively last Friday following SBI.

While the country’s second largest private bank ICICI Bank too last week said it has raised five-year tenor MCLR by 10 bps to 8.70 per cent. It has also raised the MCLR by 10 bps in loans with tenor of one year and three years.

What is also important to note is that the central bank on Wednesday hiked the reverse repo rate– the rate at which it borrows money from commercial banks — to 6 per cent. In case banks are able to mitigate the repo rate pain thanks to this, then lenders may stay put on rates.

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