The Reserve Bank of India on Friday increased mandatory cash reserve of banks held by it by 75 basis points (0.75 per cent) in a bid to suck excess liquidity to combat rising inflation.

If the Cash Reserve Ratio is increased, banks will not be able to earn any interest on this amount, impacting their overall profitability. This will prompt the banks to hike the interest rates on their loan products to make up the losses.

The floating rate home loans will see another round of increase in the interest commitments.

If banks decide to hike interest rates by 1%, this will incraese the repayments  by over Rs 3.5-4 lakh (Rs 350,000-400,000) over a 20-year period on a Rs 20 lakh home loan. Put another way, on a loan of Rs 20 lakh, the consumers will ahve to shell out upto Rs. 1,500 extra every month to meet their EMIs.