HDFC bank has raised its deposit and lending rates. Effective from Saturday, its base rate will be 10%p.a from 9.50% as earlier. The Prime Lending Rate or rate at which banks lends credit to its most credit worthy customers has been revised from 18 percent to 18.5 percent and base rate that is applied to borrower who have availed loan after July 2010. After this hike home loan customers need to pay high EMI which may straight away affect their budget. It has also revised interest paid on FD of tenure 1 year- 1 day-15 days to 9 percent from 8.25 percent and 46 days to 60 days to 7 percent from 6.75 percent.

The move has came into effect after two major banks namely ICICI Bank and State Bank of India has announced hike in lending rates. SBI has revised base rate to 10 percent and its PLR to 14.75 percent. ICICI bank too has increased its base rate to 10 percent and its floating reference rate which is benchmark for retail loans and IBAR, which is benchmark for corporate or business loans, has been raised by 50 basis points to 15.75 percent and 18.75 percent. Even the largest financing company has already raised rates by 50 basis points since last week. The entire recent hike by banks is in reaction to RBI credit policy that was announced on July 26. The repo rate has been increased by 50 percent and it stands at 8 percent and reverse repo rate stands at 7 percent.

In response to that there is rise in interest rate by HDFC Bank and it came at same time when industrial production numbers were announced. Going by statistics June industrial production has spurted by 8.8 percent and food price inflation is around 9 percent. Further, all these facts and figures has raised the prospects of further hike in policy rates in its next meeting that is likely to be convene on September 16.

Now let’s come to effect of soaring interest rate. It basically means two things

1) Your EMI would amplify as you need to pay accelerated interest and ensure of home loan will remain same.

 2) EMI may remain same and tenure of home loan may increase, so that you can pay the increased interest through more EMI payments.

Thus, in both the ways you need to spend more money. In epilogue, increase in interest rates affects the market badly and sentiment substantially goes down.