The Reserve Bank of India (RBI) on Friday hiked the repo rate by 50 basis points to 5.40 per cent to contain inflation, by which EMIs on the loan will rise.

Many banks have already raised their borrowing rates and some will again increase their rates after this hike by the central bank. For any financial institution including NBFCs Cash in the Inventory,  and all NBFC must borrow money from the market and then lend to customers.

Difference between borrowing cost and lending income is the profit for NBFC. With increase in borrowing cost NBFC has to hike the lending cost to maintain profitability. Usually interest rates on loans are variable and are linked to Repo rate  directly or indirectly. Hence when the Repo rate is changed by the government, NBFC changes the lending rate.  Ultimately, this increase in lending rate translates to the increase in EMI as the duration of the loan remains constant," said Anshu Agarwal, Finance Head (India) of Branch International.

Whenever the central bank increases the repo rate it is worrisome for existing and upcoming borrowers as their EMIs and interest rises. According to the RBI norms, banks are required to link the interest rates of loans with an external benchmark, which is generally the RBI's repo rate.

Meanwhile, the bank deposit rates are also likely to increase, bringing some relief to the common man. After the rate hike by the central bank, the timing of taking the loan is crucial for home loan borrowers as they usually borrow at floating rates. "Home loan rates are now expected to settle around 8 per cent per annum, which can put a short-term psychological dent on the demand for the mid and affordable housing segment, but we won't see that continuing for long," said Amit Goyal, CEO, India Sotheby's International Realty.

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