Shares of Indian real estate firms slumped by as much as 5 percent on Tuesday, after the central bank tightened provisions on mortgages, raising fears that already tepid demand would slow further.

Largest listed developer DLF , Unitech , Mumbai-based Indiabulls Real Estate and newly-listed Prestige Estates fell more than 3 percent each, dragging down the sector index.

Shares of smaller firms fell by as much as 5 percent. The index closed down 2.6 percent, compared with a 0.1 percent fall in the main stock index. The real estate index, the worst performer among sector indices, had slumped 3.7 percent at one point.

Earlier on Tuesday, India's central bank raised interest rates for the sixth time this year, with lending and borrowing rates going up by 25 basis points each.

It also told mortgage firms to limit loans to 80 percent of the asset value, and asked lenders to raise provisions for home loans over 7.5 million rupees to 125 percent of the loan value, from 100 percent now.

"It is a very important signal from the central bank that there is worry over real estate prices going up. The central bank is warning all participants," said Gagan Banga, chief executive at lender Indiabulls Financial Services .

Property prices in major Indian cities like Mumbai and Delhi have more than doubled over the past 18 months, spurred by rising incomes and a stock market rally.

While volumes are already down a third compared to the March quarter, developers have been undeterred because of continuing sales at high prices. With a rise in mortgage rates, the number of transactions is expected to gradually come down.

"I think floating (interest) rates are going to move up now," said Sarang Wadhawan, managing director at Mumbai-focused Housing Development & Infrastructure . "But it really does not impact the demand scenario, especially in a city like Mumbai."

Other developers preferred to look at the positive impact that the tightening norms would have, particularly if it led to softening in real estate prices.

"The overall economy is doing well, salaries are going up. I don't think it should have a significant impact immediately," Venkat K. Narayana, chief financial officer at Prestige Estates told Reuters.

"There is lot of liquidity in the industry, and CRR (cash reserve ratio) being unchanged is a good thing."

Analysts said the central bank's move would cloud the outlook on real estate stocks and also impact demand for the festive season that peaks around November, on which developers had been relying.

"There will be an impact, mainly on volumes, and if festive season does not provide a necessary tempo to companies by helping them reduce inventories, stocks would tumble further," said Surajit Pal, sector analyst at brokerage Elara Capital.

He said he expects mortgage firms to raise rates by 25 to 50 basis points.

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