Loans to get costlier from next month, say bankers

RBI impact: Loans to get costlier

Bankers said interest rates may be raised next month in response to the Reserve Bank of India raising short-term lending and borrowing rates.

  • New Delhi,  September 17, 2010  
  • |  
  • UPDATED   14:08 IST

Home, auto and corporate loans are likely to become expensive from October, with bankers on Thursday saying interest rates may be raised next month in response to the Reserve Bank of India (RBI) raising policy rates to tame inflation.

"In early October, interest rates could be revised and chances are there it could be revised upwards," state-run Bank of Baroda's Executive Director, R K Bakshi, said.

RBI raised its short-term lending and borrowing rates by 25 basis points and 50 basis points, respectively. The move is aimed at checking inflation, which was 8.5 per cent in August, much above the central bank's tolerance limit.

The government expects inflation to cool to six per cent by December.

Bankers said they will hold on to the rates till September 30, which is the half yearly closing of the banks.

High interest rates could temper demand for loans and thus curtail consumption.

"Rate of interest may have to go up. Banks have to take a view at the end of the quarter. Till September 30, I do not expect any change. Pressure is there to increase rates in the near term," Bank of Maharashtra CMD, Allen Pereira, said.

Short-term funds would get little costlier and there is a possibility the short-term (deposit) rates could also go up in the future, bankers said.

"Till September 30 everyone will hold on to the interest rate. Following that there might be some passing on effect to customer," Punjab and Sind Bank executive Director P K Anand said.

Central Bank of India CMD S Sridhar said: "Bankers will adopt a calibrated approach. The examination of interest rates is on cards as cost of funds for banks is increasing."

However, a few bankers ruled out any increase from October 1, as they will wait for further policy action of RBI.

"EMIs are not going to go up from October 1. The quarter percentage increase in policy rates were expected. Further rate hikes by bank will depend on the next policy review," HDFC Chief Executive Keki Mistry said.

He said a further increase in rate in the second quarter review in November could lead to higher rates.

The short-term lending rate (repo) goes up to 6 per cent, while short-term borrowing rate (reverse repo) rise to 5 per cent with immediate effect.

The 100 basis points gap between repo and reverse repo marks the return to the pre global financial meltdown level.

"The RBI has narrowed the corridor between the repo and reverse repo rate to one per cent. I think this is in response to containing inflation and also because the apex bank does not want too much volatility in short-term rates," Citibank's CFO Abhijit Sen said.

"The repo and reverse repo hikes were very much expected. We are heading towards normalisation of rates," RBS' India Country Executive, Meera Sanyal, told PTI.

"The raise sends a strong signal that the RBI is concerned with inflation and is targeting inflationary expectations," Sanyal said.

This is the fifth time this year that RBI has resorted to tightening monetary policy.

Liquidity is expected to be comfortable going forward but deposit and lending rates can be expected to go up, Citibank's Sen said.

Axis Bank's Head Markets, R V S Sridhar, however, said the increase "was not on expected lines...A great majority in the market did not expect the RBI to raise the repo rate."

He also said with the RBI stating that inflation would decline and also that it was expecting domestic and global growth to be slow, "the possibility of another rate hike in the future is reduced going by its (RBI's) statement.