Banks pass on rate hike to borrowers

Several commercial banks, including ICICI Bank and Bank of Baroda, raised their external benchmark linked loan rates in response to the RBI's repo rate hike by 50 bps. HDFC also hiked its rate on housing loans by 50 bps. Kotak Mahindra Bank hiked its interest rates on savings account and fixed deposits.

Economists expects a rate hike in the august and october monetary policies too which could take the repo rate to 5.5 per cent. Changes in the benchmark rate is to be passed on to the lending rates for new and existing borrowers on a one to one basis. As the external benchmark based lending rate linked loans are gaining traction, the increase in repo rate will help to reduce inflation through the credit channel also.

Increase in the repo rate have a positive impact for banks because they benefit from higher yields on the lending portfolio which is linked to the external benchmarks. Soumya Kanti Ghosh , group chief economist said that every 1 bps increase in repo will have a combined effect of ₹305 crore on demand from retail and MSME consumers, with terminal repo rate at 5.75 per cent, there will be reduction in demand from consumers to the tune of ₹45,000 crore.