Two major banks, HDFC Bank and Canara Bank, have raised their Marginal Cost of Funds-based Lending Rates (MCLR) in recent days, a move that is likely to impact home and personal loan borrowers, as well as influence share market investment sentiments.
HDFC Bank increases MCLR by 5 basis points
HDFC Bank, India’s leading private-sector bank, has increased its MCLR by up to 5 basis points (0.05%), effective from December 12. The hike comes after the Reserve Bank of India’s (RBI) decision to maintain a tight monetary stance in an effort to curb inflation. As a result, home loan interest rates are expected to rise, leading to higher equated monthly installments (EMIs) for borrowers.
The bank's one-year MCLR has now increased to 9.45%, meaning that borrowers with loans linked to MCLR will face higher repayment amounts. HDFC Bank’s move follows the RBI’s cautious stance on inflation and liquidity management, and is expected to put pressure on borrowers looking to take out fresh loans or refinance their existing loans.
The increase in MCLR also reflects the growing cost of borrowing in the broader economy. With inflation concerns lingering, many borrowers are likely to feel the pinch, especially those in long-term mortgage plans. On the share market investment front, HDFC Bank’s stock traded at ₹1,858.55, down 0.61%, on the NSE, reflecting cautious optimism as investors watch how the rate hike will affect loan demand and the bank’s overall financial performance.
Canara Bank announces MCLR increase
Canara Bank, one of India’s major public sector banks, has also revised its MCLR rates, effective December 12, 2024. The public sector lender has increased the one-year MCLR to 9.10%, a rise that will similarly affect retail and corporate borrowers. The bank’s move is likely a response to the increasing cost of funds and the RBI’s policy outlook.
This hike will likely affect a wide range of customers, particularly home loan borrowers who have loans linked to MCLR. As a public sector bank, Canara Bank’s decision may prompt similar adjustments by other banks in the sector. Investors will be closely monitoring the impact of these changes on loan growth and the bank's profitability. Canara Bank’s shares traded at ₹108.76 on the NSE, reflecting a marginal downtick, following the announcement.
Implications for borrowers and the economy
The hikes in MCLR by both HDFC Bank and Canara Bank will raise borrowing costs for home and personal loan customers. The increase in EMIs may lead to lower disposable income for many borrowers, particularly those with floating-rate loans. While this could dampen consumer spending, it is also a reflection of the banks' efforts to maintain their profit margins amid a challenging economic environment.
From an investment perspective, the higher MCLR could potentially slow down demand for new loans, affecting the growth of banks’ retail lending portfolios. However, it could also improve the margins for these banks in the short term as they adjust to higher borrowing costs. Investors might want to weigh these factors when considering share market investment in the banking sector, particularly in terms of long-term growth and interest rate trends.
Conclusion
The recent MCLR hikes by HDFC Bank and Canara Bank reflect the broader economic challenges posed by inflation and tighter monetary policy. For borrowers, this means higher EMIs, while for share market investment enthusiasts, it signals a period of cautious growth in the banking sector. Investors will be looking for how these adjustments affect the banks' profitability and loan growth as the economy navigates these turbulent times.
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