Home, auto loans may cost more

In a move to clamp down on resurgent inflation, the Reserve Bank of India (RBI), on Tuesday, raised repo and reverse rates by 25 basis points but made no changes with the cash reserve ratio (CRR) and statutory liquidity ration (SLR).

Accordingly, repo rates — the surplus amount banks park with RBI — increased to 6.5 per cent, while the reverse repo rates — short term funds banks borrow from apex bank — rose to 5.5 per cent. CRR — the level of deposits that commercial banks must keep with the central bank — stands retained at 6 per cent, while SLR also remains unchanged at 24 per cent.

With this, many in the banking circle feel that the rate of interest will rise again making home, auto and personal loans costlier. Of course, it is good news for the investors and senior citizens as interest rates on bank term deposits may also rise in sync with rate hikes. 

Addressing the customary media-meet after RBI announced its quarterly monetary policy, RBI Governor Duvvuri Subbarao pointed out that with the latest rate hike the central bank cumulatively increased the repo and reverse repo by 175 and 2235 basis points respectively, while CRR was increased by 100 basis points since mid-March 2010.

In addition to changes in the rates, Subbarrao said, RBI decided to extend the two special measures to manage the current liquidity situation. One is the additional liquidity support to banks under the liquidity adjustment facility (LAF) to the extent of upto one per cent of their NDTL (net demand and time liabilities) and secondly a daily second LAF up to April 8, this year.

Growth won’t be affected

“Inflation is clearly the dominant concern,” said the RBI chief, adding that the day’s policy action is expected to contain the spill-over from rise in food and fuel prices to generalised inflation. It also seeks to rein in inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases, he said.

Subbarao said he expects policy actions be moderate enough not to disrupt growth. At the same time, he assured that RBI will continue to provide comfort to banks in their liquidity management operations. He said, “There is enough liquidity to meet the needs of productive sector.”

He pointed out that the inflation rate itself remains unacceptably high, the reversal in the direction of inflation is striking. Consequently, RBI upped the inflation projection to 7 per cent by March-end, from the earlier estimated 5.5 per cent and warned against a possible spill over of high food and energy prices to a more generalised inflation.

The latest higher estimate is on account of high food, fuel prices high and persistent demandpressures building up in the economy.  The overall inflation for December shot up to 8.43 per cent on high prices of food items, from 7.48 per cent in November. Giving guidance, Subbarao said the current growth and inflation trends clearly warrant that RBI persists with the anti-inflationary stance.  While looking beyond the current fiscal, RBI expects domestic growth momentum to stabilise, while inflation is expected to moderate from the first quarter of fiscal 2012, but several upside risks are already visible.  “The monetary stance will be determined by how these factors impact the overall inflationary scenario,” the Governor stated.

As the rate hike of 25 basis points was expected, the stock market reacted positively this afternoon after RBI announced the rate hike in the policy review, but the momentum was shortlived as the apex bank followed it up with an hike in the inflation projection to 7 per cent from the earlier 5.5 per cent, which sent BSE Sensex below 19K level and Nifty dipped below 5,700 mark.