Equated monthly installments (EMIs) on home and retail loans are likely to become costlier with the Reserve Bank of India (RBI) Governor Raghuram Rajan announcing an increase in repo rate by 25 basis points to 7.75 per cent on Tuesday.
The RBI, in its second quarter review of Monetary Policy 2013-14 on Tuesday, also reduced the Marginal Standing Facility (MSF) rate by 25 basis points, from 9 per cent to 8.75 per cent. This will ease liquidity in the banking system by lowering the cost of borrowing for lenders.
Rajan said, “One should not assume that the next rate move will be upwards.”
Along with the cut in MSF, the RBI kept cash reserve ratio (CRR) for banks unchanged at 4 per cent. Consequently, reverse repo rate under the Liquidity Adjustment Facility (LAF) stood adjusted at 6.75 per cent, while bank rate was reduced to 8.75 per cent. The MSF and bank rates were set at 100 basis points above the repo rate.
The RBI raised interest rates for the second time in as many months, warning that inflation was likely to remain elevated despite a sluggish growth, and rolled back an emergency measure to support the rupee. “Overall WPI (wholesale price index) inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response,” Rajan said.
Most economists believe that the RBI’s new approach came with a single-minded focus to contain inflationary expectations.
The central bank has been struggling for a year to bring down inflation, which has remained stubbornly high, leading to a slowdown in growth.
Annual food inflation was the highest since 2010 at 18.4 per cent in September.
Bankers, however, remained ambivalent on the impact of Tuesday’s announcement on the cost of funds.
ICICI Bank Managing Director and CEO Chanda Kochhar said: “I think there are a lot of moving parts here, so I think one should wait for some time and then see what exactly are the effects on the cost of funds and then only take a call.”
HDFC Bank head Aditya Puri said: “Cost of funds over the last three months have gone up. We are going back to a normalised monetary policy and over a period of time, it would come down.” If deposit rates went up, lending rates would also increase.
State Bank of India chairperson Arundhuti Bhattacharya said: “Yes, some rate changes will be expected and the asset liability committee of every independent bank will look into the matter.”
Punjab National Bank CMD K R Kamath, who also heads industry body Indian Banks Association, said: “There is a feeling that the returns we are giving to the depositors are negative if you factor in average inflation impact. Unless you make your deposits attractive, the money may not come to the banking system...banks should work on getting deposits.” This, however, should not be seen as a hint at upping the deposit rate.
The Sensex rose almost 2 per cent on Tuesday after the RBI’s announcement, snapping a five-day losing streak to hit its highest close in nearly three years.
It rose 358.73 points to close at 20,929.01, the highest since November 2010.
The 50-unit CNX Nifty rose 1.96 per cent (119.80 points) to 6,220.90, closing above the psychologically important 6,200 mark.
