Your home loans could get costlier and your budget squeezed further as the Reserve Bank of India (RBI) on Tuesday raised a key interest rate to tame high inflation.
In a surprise move that could force banks to raise lending rates, the RBI announced a 0.25 percentage point hike in the repo
rate — the rate at which banks borrow from the central bank— to 8%.
No bank has, however, announced an interest rate hike yet, stating that any action will come only after analysing their cost of funds over the next few days.
“You should watch the trend in inflation and in deposits, which really impact our cost of funds and, therefore, lending rates. So, you cannot say something very quickly till we actually see what we need to do on the deposit rates as well,” said Chanda Kochhar, managing director, ICICI Bank.
M Narendra, chairman and managing director, Indian Overseas Bank, echoed a similar view: “We would have to do a full analysis on the cost of funds, but at this point I cannot say which would be those ones.”
Softening the blow a bit, RBI governor Raghuram Rajan virtually ruled out further hikes in lending rates in the immediate future. “Further policy tightening in the near term is not anticipated at this juncture,” he said in the third quarter monetary policy review.
The unexpected hike in the benchmark lending rate came despite lower inflation rates in December. India’s wholesale inflation rate eased to a five-month low of 6.16% last month while retail inflation — a more realistic index as it captures shop-end prices — grew at a three-month low rate of 9.87% compared to 11.16% the previous month as fresh seasonal arrivals pushed down vegetable prices.
Read: Rajan defends rate hike, says cut wouldn't have helped banks
Pointing out that retail inflation “is too high, we need to bring it down”, Rajan said, “We have injected some medicine… we have to watch how this works.”
The RBI also cut its growth forecast to less than 5% for 2013-14, but placed its bets firmly on a turnaround in the broader economy in the next financial year.
Its latest move drew sharp reactions from business leaders who have been clamouring for an interest rate cut, arguing that costly borrowing and high raw material costs have crimped expansion and hiring plans.
“At this juncture we need policy support from all directions to get the industrial sector back on track. We hope growth and employment considerations merit greater attention in RBI’s policy decisions in the coming months,” said Sidharth Birla, president of industry body Ficci.
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