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RBI hikes repo rate again, home loans to get costlier

By Rishabh Chamoli | 2022-09-30

RBI hikes repo rate again, home loans to get costlier

The Reserve Bank of India (RBI) has increased the repo rate by 50 basis points in its review meeting on September 30, 2022. Since April 2022, it is the fourth consecutive hike amid the inflation rate soaring high. The RBI has increased the repo rate by 190 basis points so far.

The year 2022 has witnessed the Reserve Bank of India (RBI) announcing multiple upward revisions in repo rate the rate at which it lends money to banks. Not surprisingly, after four corrections this year since April 2022, the current repo rate stands at 5.90 percent. The recent increment of 50 basis points is another step by the apex bank to counterbalance the rising inflation. However, the move is also expected to bring hikes in home loan interest rates charged by banks to, thus, impacting the home purchasing power of the masses.

Updates on repo rate and home loan interest rates in 2022
Punjab National Bank (PNB), a leading public sector bank, has once again raised its Marginal Cost of Funds Based Lending Rate (MCLR) by 0.05 percent across tenors, effective from September 1, 2022. ICICI Bank and Indian Bank have also increased the rate by 10 basis points, applicable from September 1, 2022 and September 3, 2022, respectively. While Indian Banks MCLR will now be in the range of 6.95 to 7.75 percent, the MCLR for ICICI Bank is now between 7.75 percent and eight percent. Further, Canara Bank has increased its MCLR by up to 0.15 percent. Indian Overseas Bank and Bank of Baroda (BOB) have also increased their MCLR rates by up to 0.10 percent. While the new rates have been effective from September 10, 2022 for Indian Overseas Bank, BOBs rates will come into effect starting September 12, 2022.

The continuous upward revisions in the lending rates can be attributed to be the snowball effect of repo rate hikes by the Reserve Bank of India (RBI) since May 2022, starting with an increment of 40 basis points. The other two revisions by the RBI were announced in June and August 2022 at 50 basis points each, which makes the current repo rate 5.4 percent.

Hikes announced by banks in August 2022
The State Bank of India (SBI) hiked its MCLR for the third time by 20 basis points across all tenors, effective August 15, 2022. The bank had previously increased its lending rates in June 2022 in the wake of increased repo rate by 90 basis points (bps). Less than two months later, the Reserve Bank of India (RBI) increased the lending rate by 50 basis points again on August 5, 2022. This brought about updates in the lending rates of various banks.

Following the update, the ICICI Bank further increased its External Benchmark Lending Rate (EBLR) to 9.10 percent, effective from August 5, 2022. PNB raised the Repo Linked Lending Rate (RLLR) to 7.90 percent, starting August 8, 2022. Also, the Housing Development and Finance Corporation (HDFC) Bank hiked its Retail Prime Lending Rate (RPLR) by 25 basis points, effective from August 9, 2022. Further, the MCLR hike of up to 0.20 percent across tenors by BOB came into effect from August 12, 2022. SBI further effected a 50 basis point hike in its EBLR and RLLR, in addition to the MCLR increment. Bajaj Housing Finance and LIC Housing Finance also increased their lending rates by 0.50 percent. While the interest rates of Bajaj Housing Finance started from 7.70 percent, the LIC Housing Finance announced their loans eight percent onwards.

What is External Benchmark Lending Rate (EBLR)?
External Benchmark Lending Rate (EBLR) is the minimum interest rate set by the banks at which they lend loans. It is based on external benchmarks such as repo rate. The benchmark is set for floating interest rate loans.

What is Repo Linked Lending Rate (RLLR)?
Repo Linked Lending Rate (RLLR) is the lending rate which is based on the repo rate set by the RBI. The revision in repo rate has a direct impact on the RLLR. In case of a loan based on RLLR, the floating interest rate will fluctuate up and down as per the revisions in repo rate.

Hikes announced by banks in April to June 2022
Anticipating a hike in repo rate, institutions like BOB, Axis Bank, and Kotak Bank also followed SBIs suit and hiked their MCLR by five basis points over a week between April 12 and April 18. HDFC Bank increased its RPLR from May 1, 2022. However, the rates were further revised upwards by five basis points from June 1, 2022. The increase affected the banks floating home loan rates. ICICI Bank also increased its External Benchmark Lending Rate (EBLR) to 8.10 percent effective from May 4, 2022. Further, ICICI Bank and Punjab National Bank (PNB) hiked their MCLR by 30 basis points and 15 basis points from June 1, 2022, respectively. The announcement came after the RBI revised its repo rate to 4.40 percent on May 4, 2022 after keeping it unchanged at four percent since March 2020. The other two consecutive revisions by the RBI in June and August stand at 50 basis points, each, which makes the current repo rate 5.4 percent.

What is MCLR and its impact on your home loan EMI?
Since its inception in 2016, MCLR has been in the news with reference to interest rate cut by the RBI. Here is a lowdown on MCLR and its effects on EMI.

The move will make the Equated Monthly Instalments (EMI) on the various loans like home, auto and personal more expensive. Other banks are also expected to follow suit.

MCLR is a benchmark interest rate, which is the minimum interest rate a bank charges on loan. This was set by the RBI in 2016 to ensure uniformity and better pricing for customers.

Will the increase in lending rates discourage homebuyers?
Realty experts believe that an upward revision in lending rates would upset the market, particularly the homebuyers. This combined with an increase in the rate of units in new housing societies by builders due to increasing raw material cost could hurt the buyer sentiment further. The home ownership appetite might decrease in the short term. But, it will largely depend on State governments decisions to extend or offer some subsidies on stamp duty and registration costs to counter balance the impact of the increase in home finance and new home costs.

Home values in the National Capital Region (NCR) have gone up by 10 percent lately amid the increase in raw material costs. According to Ankur Gupta, JMD, Ashiana Housing Ltd, The housing units that were earlier priced at Rs 3,400 per sq ft are now being sold at Rs 3,800 per sq ft. This upward price revision means that homebuyers have to shell out an additional amount to buy their dream home. Overall, there could be a cautious sentiment amongst homebuyers until prices settle or some booster policies are announced by the Government.