RBI Liquidity Squeeze: What It Means for Home Loan Buyers and Borrowers in India

What happened?

ET BFSI reported that the Reserve Bank of India has lifted the repo rate to 5.50 per cent and tightened how banks hold their cash reserves. From the fortnight starting October 16, the daily floor for reserve holdings rises to 99 per cent of the requirement, up from 90 per cent. The central bank has also lined up a Rs 25,000 crore government securities sale on October 13 to soak up surplus money.

According to the same report, Bank of Baroda and Axis Bank grew advances faster than deposits in Q2FY27, with advances up 18.3 per cent and 22.7 per cent against deposit growth of around 16.8 per cent and 20.7 per cent. HDFC Bank and Bank of India showed the reverse pattern. ET BFSI cautioned that these gaps do not prove any bank is short of funds. It also noted that system liquidity was in surplus at Rs 3.88 lakh crore on October 9.

In a second report, ET BFSI cited Jefferies estimating that the cash-holding change could pull Rs 400-800 billion out of the system and add only 1-2 basis points to banks' cost of funds. Jefferies expects the larger strain to fall on NBFCs and corporates, and said it still prefers banks to NBFCs while rates rise.

Which sectors are affected?

• Home loan borrowers
• Banks
• NBFCs and housing finance companies
• Floating-rate loan holders

Potential impact

For a borrower, the practical channel is the repo rate. Floating home loans linked to it can reset upward, so EMIs or loan tenures on existing loans may lengthen or rise after the next reset. New loans may also be priced higher. Jefferies' estimate of a 1-2 basis point rise in banks' funding cost suggests the liquidity step alone is modest; the repo increase is the bigger driver.

NBFCs and housing finance companies could feel more strain because they lean on market and wholesale borrowing and may find it hard to pass costs on quickly. That could make their loans costlier or harder to get for some buyers. Whether this dents housing demand depends on how long liquidity stays tight and how many banks pass costs on; the reports do not give a forecast for property prices.