HDFC Bank hikes key lending rates by 0.05-0.15%; should borrowers worry?

HDFC Bank MCLR hike: HDFC Bank – India’s largest private sector lender – on Wednesday increased its marginal cost-based lending rate (MCLR) by 0.05-0.15 per cent. The move comes a day ahead of the RBI is due to announce the outcome of its three-day, bi-monthly deliberations.

HDFC Bank's latest hike is applicable to maturities of overnight to six months, effective immediately. MCLR is the minimum interest rate below which a bank cannot lend money.

The RBI is widely expected to leave the repo rate – the key interest rate at which it lends money to commercial banks like HDFC Bank – unchanged at 6.5 per cent. The central bank had surprised the market with a status quo on the key lending rate in its April review.

What is MCLR?

MCLR (Marginal Cost of Funds Based Lending Rate) is the minimum interest rate below which no bank can lend to customers. It is mandatory for banks to declare their overnight, one-month, three-month, six-month, one-year and two-year MCLR rates every month.

What happens if MCLR is hiked?

A hike in MCLR means that interest rates on loans related to marginal costs such as home, vehicle, and personal loans will rise. The bank's rate hike will make interest rates on EMI more expensive for both new and old borrowers. This is applicable on floating interest rates and not on fixed interest rates.

Earlier on May 8, 2023, HDFC Bank had increased its MCLR rates by 5-15 basis points on select tenors. Besides HDFC Bank, other public sector banks such as SBI, Canara Bank and Bank of Baroda had also raised the MCLR rates in the last month.

India Ratings and Research – a rating agency firm – in its study had estimated that the commercial banks are likely to increase the marginal cost of funds-based lending rate (MCLR) by 100-150 basis points (bp) in this financial year (FY24) amid a rise in the cost of money and tight liquidity.

The rating agency in March 2023 had pointed out that the transmission of monetary policy in the banking system could intensify in FY24 driven by the sharp rise in bank's marginal cost of funding.

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