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Loans To Become Costlier, RBI Hikes Interest Rate

Mumbai, July 26: Personal and corporate loans will become more expensive, with the RBI today raising key interest rates sharply for the third time in the last three months, by 0.50 per cent, to arrest
loans to become costlier rbi hikes interest rate...
PTI July 26, 2011 22:22 IST

Mumbai, July 26: Personal and corporate loans will become more expensive, with the RBI today raising key interest rates sharply for the third time in the last three months, by 0.50 per cent, to arrest price rise.

The central bank, in its quarterly review of the monetary policy, has also revised its fiscal-end inflation projection to 7 per cent from 6 per cent earlier. It has retained the growth project for the current fiscal at 8 per cent. 

With a 50 bps hike, the repo rate (at which the RBI lends to banks) would be 8 per cent and the reverse repo rate (at which it borrows from banks) to 7 per cent. However, the cash reserve ratio (CRR), the amount all banks need to park with RBI, remains unchanged at 6 per cent.

All loans, including auto, home, personal and other corporate borrowings, are expected to cost more following the RBI's decision.

Expectedly, industry expressed its disappointment over the sharp increase in interest rates, saying the move would harm the investment sentiment.

“We thought it would be 25 basis points. The RBI has seen something which industry has not... investment sentiments will be muted in the next six months,” Ballarpur Industries Limited Chairman Gautam Thapar told PTI.

The stock market also reacted sharply, plunging by over 300 points within minutes of the RBI's policy announcement. 

“Notwithstanding signs of moderation, inflationary pressures are clearly very strong... inflation continues to be the dominant macroeconomic concern. On the basis of this assessment, it has been decided to increase policy repo rate by 50 basis points from 7.5 to 8 per cent with immediate effect,” RBI Governor D Subbarao said while unveiling the the monetary policy.

Inflation, currently hovering above 9 per cent, he said, would continue to guide the policy stance in future. The RBI's next review is scheduled on September 16. 

The RBI admitted that the cumulative impact of past actions to curb demand and anchor medium-term inflationary expectations will curtail growth in the near term.  Bankers are of the view that the increase in key policy rates by the RBI will definitely have an impact on interest rates, leading to loans becoming more expensive. 

“The hike is more than expected and it will push interest rates by up to 50 basis points,” said Oriental Bank of Commerce Executive Director S C Sinha.  Within an hour of monetary tightening by the RBI, private sector YES Bank hiked its base rate or minimum lending rate by 50 basis points.

The bank hiked its base rate by 50 basis points to 10.25 per cent with immediate effect, making new loans more expensive by at least 0.5 per cent.

In its annual policy meet on May 3, the apex bank had increased policy rates by 50 basis points, which was followed by a 25 basis points hike at its mid-quarter review in June. 

Sounding hawkish, the Governor said, “Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which in turn will be determined by trends in the domestic growth and global commodity prices.”

Admitting there has been a moderation in growth, the Governor maintained his previous estimate of 8 per cent GDP growth for the current fiscal and identified the downside risks to growth as global commodity prices, the uncertain global macroeconomic environment and the Centre's inability to meet the fiscal deficit target of 4.6 per cent on the back of a rising fuel subsidy bill. PTI

 

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