The Telegraph
Since 1st March, 1999
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Rate bite looms again

Mumbai, March 30: Brace for another rise in interest rates on your home and car loans.

The RBI today delivered an unexpected triple blow to banks. First, it raised a compulsory deposit called the cash reserve ratio (CRR) that banks must maintain with the central bank by half a percentage point to 6.50 per cent.

Second, the apex bank tweaked a key short-term interest rate — the repo — upward by 25 basis points to 7.75 per cent. Third, it pared the interest on the CRR deposits by half a percentage point to 0.50 per cent.

The upshot: a surge in the cost of funds for banks, which they will almost certainly pass on to their borrowers.

The private-run Yes Bank was first off the block, raising its lending rate from 14 per cent to 14.75 per cent.

Other banks aren’t saying exactly when the rate increases may happen but indications are that it will be in the first fortnight of April. Banks are now busy closing their books for the financial year.

“Interest rates are going to rise,” said Rupa Rege Nitsure, the chief economist with Bank of Baroda. K. Ramakrishnan, the chairman and managing director of Andhra Bank, said the bank might review its interest rates next week. A State Bank of India official indicated that the country’s largest bank may also review its rates shortly.

The CRR is a device that the RBI uses to suck out excess money from the financial system. The two-step increase in CRR will drain about Rs 15,500 crore from the banking system. This means banks will have less money to lend.

The central bank has been forced to take the monetary tightening measure in order to slam the lid on the tearaway inflation which is surging at 6.46 per cent.

Although some private sector banks and housing finance companies raised interest rates on housing and other loans after that hike, most of the nationalised banks left their home loan rates unchanged. However, this is unlikely to happen this time around.

Prospective car buyers may be hit amid reports that sales in March have been sluggish because of the earlier rate rises. Another rise will queer the pitch for several carmakers planning to unveil new and upgraded models.

Interest rates on home loans, which have already risen by more than 1.5 per cent this financial year, may go up by another quarter to half a percentage point. A 25-basis-point hike means the equated monthly instalments (EMIs) for every lakh of rupees will go up by Rs 16 for a 20-year tenure.

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