RBI ups key rate, loans to cost more | business | Hindustan Times
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RBI ups key rate, loans to cost more

business Updated: Jun 25, 2008 01:25 IST
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Bad news for home loan borrowers: Get ready to shell out more in EMIs if yours is a loan taken on a floating rate.

The Reserve Bank of India on Tuesday increased the rate at which it lends to commercial banks in the short term — the repo rate — to 8.5 per cent from 8 per cent, in a bid to discourage consumer spending and rein in inflation that has surged to double digits. It also increased the share of deposits that banks must hold in reserves — the cash reserve ratio — to 8.75 per cent from 8.25 percent.

The central bank’s decision is expected to push commercial banks to increase their lending rates, including those on housing mortgages, by at least half a percentage point, bankers and experts said.

“At the outset, half a per cent (point) increase in lending rates looks likely,” said Keky Mistry, managing director of HDFC Ltd, the country’s largest housing finance company. “We will take a decision next week,” he said.

Vijaya Bank CMD Prakash P Mallaya said he expected similar raises.

If that happens, the monthly installment on a Rs 20-lakh loan with a 20-year tenure will increase by Rs 676. That means in a full year you will have to shell out Rs 8,112 more in interest.

Some experts, however, said home loan rates could go up by as much as 1 percentage point — although that is unlikely to come in one shot — because there would be pressure on banks to increase deposit rates.

Higher deposit rates coupled with a fall in liquidity will push up the cost of funds for banks, which, in turn, will try to pass it on to consumers. The pinch may get even bigger.