Equivalent monthly instalments (EMIs) and borrowing costs will become more expensive as major Indian banks raise lending rates or after the RBI hikes its key repo rate by 50 basis points to combat rising inflation.

The repo rate is the rate at which banks borrow money from the Reserve Bank of India, and an increase in the rate would lead to higher borrowing costs for consumers.

Since May, financial institutions have been raising interest rates frantically to match the RBI’s monetary tightening. This means that EMIs on loans will become more expensive, and interest on fixed deposits will also become more expensive.

State Bank of India:
State Bank of India, the country’s largest lender, has raised its marginal cost of lending rate (MCLR) by 10 basis points or 0.1% from July 15, 2022.

While SBI has yet to pass on the August RBI hike to customers, please see the table below for an explanation of the 20-year home loan EMI change based on expected growth.

HDFC Bank:
Mortgage lender HDFC Ltd on Monday announced it would raise its benchmark lending rate by 25 basis points, a move that will make lending more expensive for existing and new borrowers.

This is the second rate hike this month, after a 25-basis point hike that began on August 1 and was HDFC’s sixth in three months. The rate has risen 140 basis points since May of this year.

Interest rates for existing customers will increase by 25 basis points or 0.25%. HDFC follows a three-month cycle to reprice existing customer loans. Therefore, the loan will be revised according to the increased loan interest rate based on each customer’s first payment date.

ICICI Bank, Punjab National Bank to increase lending rates based on external benchmarks:
Two major lenders, ICICI Bank and PNB, raised lending rates after the Reserve Bank of India raised its benchmark rate by 0.5% on Friday.

The ICICI Bank External Benchmark Lending Rate (I-EBLR) refers to the RBI’s policy repo rate, which is higher than the repo rate, ICICI Bank said in the notice.

Earlier this month, ICICI Bank raised the marginal cost of the funds-based lending rate (MCLR) for all tenors by 0.15%, ahead of the RBI’s policy rate announcement.

The state-owned Punjab National Bank (PNB) has also raised its external benchmark repo-linked lending rate to 7.9%.

A 2017 report by the RBI’s internal research group said the benchmark rate, or internal benchmark rates such as the MCLR, did not effectively transmit the central bank’s monetary policy repo rate decision. Then it recommends switching to external benchmarks.

Subsequently, from October 1, 2019, all new floating rate personal and retail loans (housing, auto) and bank floating rate loans to small and micro businesses are linked to an external benchmark (repo).

Banks can use external benchmarks such as the RBI’s repo rate, government bond-based yields published by Financial Benchmarks India Private Ltd (FBIL), or any other benchmark market rate published by FBIL.

Lenders are free to determine spreads on external benchmarks and make loans linked to external benchmarks to other types of borrowers.

Rates under external benchmarks should be reset at least every three months, as directed by the RBI.