Equated monthly instalments on home loans are set to increase with mortgage firm HDFC increasing its retail prime lending rate, on which its adjustable rate home loans are benchmarked, by 20 basis points. The new rates will be with effect from April 1, 2018.

This is the first hike by HDFC after the firm cut interest rates on home loans of up to Rs 30 lakh by 15 bps for new borrowers 8.35 per cent for female borrowers and 8.40 per cent for others in May 2017 to gain from the momentum created by the government’s support for affordable housing. Individual loans comprise 72 per cent of HDFC’s assets under management. During the December quarter, 70 per cent of incremental loans came from individual loans. As on December 31, the loan book stood at Rs 3.42 lakh crore against Rs 2.87 lakh crore in the previous year.

Many banks led by State Bank of India have already raised their lending rates, signalling a rise in EMIs on retail loans, including home and car loans, more expensive borrowings for companies, and the end of a soft-interest regime which lasted for almost 18 months. In March, SBI hiked deposit rates by up to 75 basis points and the one-year Marginal Cost of Funds based Lending Rate or MCLR by 20 basis points (bps) to 8.15 per cent from 7.95 per cent. ICICI Bank, India’s largest private bank, raised its one-year MCLR from 8.2 per cent to 8.3 per cent and overnight MCLR rate from 7.8 per cent to 7.95 per cent. New loans will now become expensive as they are linked to the one-year MCLR.

Bankers say the rise in lending rate is due to the rise in deposit rates, the overall cost of funds and shortage of liquidity in the system. Under the present loan pricing mechanism that is based on the MCLR, any upward revision in the cost of funds, including deposits pricing, automatically leads to a pricing revision in loans. The RBI last cut the repo rate by 25 basis points to 6 per cent in the August 2017 policy review. It retained the repo rate at this level in the last four policy meetings.