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After the Reserve Bank of India (RBI) decided to increase both the repo rate and reverse repo rate by half a percentage points each, to 7.25% and 6.25% respectively, banks and financial institutions are likely to increase their lending rates sooner than later. While repo rate is the rate at which RBI lends short-term funds to banks, RBI accepts short-term deposits from banks at reverse repo rate. Even more worrying for the feel-good factor of the Indian economy is the RBI’s projection moderating the economic growth to around 8% for 2011-12 , from around 8.6% in 2010-11 .This will affect the general mood of the investors, as it will bring down the return on investment in the economy. In the Union Budget presented by finance minister Pranab Mukherjee on February 28,2011,the government had estimated an economic growth rate of 9%. Therefore, one percentage point lower than the projected one for the year and 60 basis points lower than the previous year will have a severe impact on the mood of the investors and other players in the economy. The hardening of the interest rates coupled with slowdown in the economy will affect the activities in the real estate sector as well. The lowering of the economic growth is mainly on account of the efforts taken by the central bank to contain inflation which is presently hovering around 9%. Ashutosh Limaye, director (strategic consulting) at Jones Lang LaSalle India, says, “It has always been axiomatic that when financial institutions raise their lending rates, there are bound to be ripples on the highly cost-sensitive Indian real estate market.” The latest rate hike obviously means that the cost of construction has gone up for developers and this increase in repo rates by the RBI certainly does not come at the best of times for them.Limaye says banks have already taken a cautious approach to real estate lending and reduced their exposure to the sector. As result, most developers are now raising a larger component of their construction costs from the private sector.The fact that such funds come at a higher cost of borrowing has already increased their construction costs significantly. Under such circumstances ,it is logical to assume that developers would not hesitate to pass on the incremental burden to buyers to maintain their profit margins. This would certainly happen if buyer sentiments and resultant market activity were high enough to accommodate it. But, Limaye says that the market for residential real estate is far from effervescent at the moment. In a case where staying competitive and selling stock is of the utmost essence,developers are unlikely to increase the cost of their units and thereby risk losing more customers. While this will certainly impact their revenues to an extent, most developers see a sufficient profitability quotient to make a strategic decision on this count. On the whole, the increase in the rate would slowdown activities in the real estate sector.