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Mumbai, June 16: Home loan borrowers will have to brace for another increase in their equated monthly installments (EMIs) with banks expected to raise lending rates once again.
The fresh bout of interest rate hikes on home, auto and personal loans became inevitable after the Reserve Bank of India (RBI) today raised its key policy rate – the repurchase rate or the repo – by quarter of a percentage point to 7.5 per cent.
The repo rate hike is the tenth increase since March last year and is an indication of the RBI’s desperate but unsuccessful bid to quell inflation, which is trending at over 9 per cent.
The reverse repo rate – at which the RBI soaks up excess cash in the financial system – was also raised by the same margin to 6.25 per cent.
“The RBI has tried to maintain an interest rate environment that moderates inflation and checks inflationary expectations … this was on expected lines,” said finance minister Pranab Mukherjee.
The rate hikes in India comes after China, South Korea, and Brazil tightened monetary policy earlier this month. The central bank’s move will immediately raise the cost of short-term borrowing for banks with many of them expected to pass on the burden to their consumers.
Chanda Kochhar, chairman and managing director of ICICI Bank, indicated that a rate rejig by the country’s second largest bank was imminent.
“This measure (raising the repo rate) and the prevailing tight liquidity conditions could lead to an increase in the funding costs for banks and in lending rates,” she added.
M.V. Nair, chairman of Union Bank of India, said the bank would pass on the rate hike to its borrowers but didn’t say when. Sources said if banks were to raise their lending rates by the same margin as the repo rate hike, the EMI would go up by Rs 17 per lakh on a 20-year loan.
Others were less certain about an immediate increase in home and auto loan rates. “Banks which are short of cash and have been borrowing heavily from the RBI’s repo window will be the first to raise rates,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
“Those banks which aren’t facing a liquidity crunch or a huge demand for credit may not choose to act just now.”
United Bank of India chairman and managing director Bhaskar Sen said the policy rate increase would have no impact on his bank’s lending and deposit rates.
The 25 basis point hike in the repo today comes on top of a 50 basis point increase on May 3.
The RBI said the rate action in May had prompted 45 banks to raise their base rates by 25 to 100 basis points. Lending rates on all loans from July 1 last year are linked to the base rate.
State Bank of India, ICICI Bank and HDFC Bank have a base rate of 9.25 per cent while other leading banks have pegged it at 10 per cent.
The central bank also added that 47 banks had raised their base rates by 150 to 300 basis points since July last year. One hundred basis points are equivalent to 1 percentage point.