Inflation has begun to bite. IDBI Bank has withdrawn the 0.5 per cent cut in rates of home loans and other debt it had announced on Wednesday. Many other banks, say industry experts, are likely to follow suit.
Inflation is at a 12-month high of 6.7 per cent, making it costly for banks to raise funds. This burden will have to be passed on to borrowers through higher interest charged on their loans.
Apart from IDBI, HDFC, State Bank of India, Canara Bank, Bank of Baroda, Bank of India, Allahabad Bank and Union Bank of India had cut loan rates since February 1.
Banking sources, requesting anonymity, confirmed they are seriously considering raising loan rates but are waiting to see which way inflation heads now.
Confirming inflation is the trigger, IDBI’s chief financial officer R.K. Bansal told Hindustan Times: “Our decision is in line with market trends. We may reconsider after 10 days.”
A rise in interest rates was expected after benchmark security yields rose by 0.13 per cent to 7.91 per cent in the government securities market.
M.S. Sundara Rajan, chief of Indian Bank, said: “It’s too early to predict upward movement in interest rates...” Added a senior banker: “We can wait till the Credit Policy next month to decide.”