Loans may cost more as RBI hikes rates to combat inflation

Loans may cost more as RBI hikes rates to combat inflation

The RBI has hiked the repo rate by 25 basis points from 5.75 to 6.0 per cent and the reverse repo rate by 50 basis points from 4.5 to 5.0 per cent with immediate effect. This, in turn, will lead to a rise in the interest rates at which banks eventually lend money to customers.

At the same time, deposit rates would also rise along with lending rates in due course. The hike comes shortly after a similar raise in repo and reverse repo rates by the RBI on July 27, 2010.

The apex bank, however, maintained the Cash Reserve Ratio (CRR) at 6  per cent, bank rate at 6 per cent and the Statutory Liquidity Ratio (SLR) at 25 per cent. From a policy rate transmission perspective, there is a clear message to the banking system to realign deposit and lending rates.

“We might consider passing on this hike, but we have to work it out though we don’t see any immediate impact on banks. But at the same time, the expectations from depositors will go up, who would expect us to raise deposit rates by at least 25 basis points,” says Bank of India’s Executive Director B A Prabhakar.

The purpose behind hiking the rates was to contain inflation without disrupting growth. It also intends to reduce volatility in overnight call money rates, thereby strengthening monetary transmission mechanism. “Inflation remains the dominant concern in macroeconomic management,” the RBI said in a press release.

ICICI Bank’s Managing Director and CEO Chanda Kochhar pointed out that the RBI in its mid-quarter policy review reiterated its confidence in the growth prospects for the Indian economy, driven by a strong industry, sustained growth in the services sector and better performance of agriculture aided by good monsoons. “Clearly, the dominant concern of the RBI has been the continued high levels of inflation, notwithstanding the moderation in August 2010,” she added.

Leading industry body, the Confederation of Indian Industries recommended that the RBI should now pause after its series of rate hikes since October 2009. The RBI’s rate and liquidity actions since October 2009 have been driven by two considerations. One is the normalisation of the monetary policy stance as the crisis abated and another is inflation management.

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