Be prepared for higher EMIs on auto, home and other loans. This is the likely fallout of RBI governor Raghuram Rajan’s decision to raise the policy rate by 25 basis points — the first hike after a gap of almost two years — to keep inflation under check.
Contrary to the expectations of the industry and experts, Rajan in his maiden policy review on Friday opted for a hawkish monetary stance ahead of the festive season instead of shifting the focus to growth promotion by lowering interest rates to generate demand.
With the Reserve Bank of India (RBI) unexpectedly increasing policy rates by 25 basis points, bankers now have to go back to their boardrooms to decide whether to increase lending rates.
While most lenders said it was too early to say rates would increase, the country’s largest lender, the State Bank of India, said the central bank’s stance was likely to put pressure both on lending and deposit rates.
The repo rate (the rate at which banks borrow from the central bank) and reverse repo (the interest rate that RBI pays to commercial banks on their short-term deposits) have been increased by 25 basis points.
The RBI, however, has to a large extent rolled back the measures announced in July to tighten liquidity to cushion the rupee, which would ease the cost of funds for banks.
“Now the busy season has started so there is a huge credit demand and banks are scrambling for deposits… deposit rate, I think, will go up and accordingly lending rates can also go up,” Pratip Chaudhuri, chairman, SBI said after the credit policy was unveiled.
The SBI has increased its base rate by 0.1% to 9.80%.
The chairman of a mid-sized bank who did not wish to be identified said the increase in repo rate had come as a surprise and banks would need to rework the lending rates.
Yes Bank founder managing director and CEO Rana Kapoor said lending rates might not go up immediately due to ease in liquidity. “The cost of funds would come down for banks besides the move would also ease liquidity giving banks headroom to function without increasing lending rates.”
Ashvin Parekh, national leader, global financial services, Ernst & Young, said banks were likely to increase interest rates, not necessarily due to the hike in repo and reverse repo but due to the macro economic situation which has put pressure on the quality of assets.