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RBI ups rates; banks to wait

business Updated: Jul 28, 2010 00:30 IST
HT Correspondent
HT Correspondent
Hindustan Times
Reserve Bank of India

Prices may fall in the near future, while interest rates on your home, auto or personal loans may not rise immediately.

In a curious turn on Tuesday, the RBI raised its policy rates and signalled to commercial banks to increase their deposit and lending rates as well, but banks said they'd rather wait.

The RBI announced a 0.25 percentage point hike in the repo rate (the rate at which it lends to commercial banks) raising it to 5.75 per cent and a 0.50 percentage point hike in the reverse repo rate (the rate at which the central bank borrows from the commercial banks).

The reverse repo rate has been increased to 4.5 per cent.

The trigger: a fresh effort to tame the high inflation rate, currently hovering in double digits --- and stalling proceedings in Parliament.

"As credit demand picks up, liquidity gets tightened and other monetary policy actions start playing up, both deposit rate and lending rate should go up," RBI Governor D Subbarao said.

"Bankers have told us that deposit rates will rise before the lending rates go up."

Bankers sid that the liquidity situation — amount of money sloshing in the system — would determine what they do next.

"I do not see a rise in rates in the immediate future but if there are more policy rate hikes in the coming months or there is a sharp contraction of liquidity, it may lead to a rise in lending rates," HDFC Vice Chairman and CEO Keki Mistry said.

"There will not be any immediate impact on the rates but in next three to six months there may be increase of 50 basis points (100 basis points make 1 percentage point) in deposit and lending rates," Kotak Mahindra Bank Head (Retail Liabilities and Branch Banking) K V S Manian said.

A rise in credit growth to support a high GDP growth may further push bankers to revise the rates upward if liquidity tightens.

"The liquidity situation has brought the system to a stage where policy rate actions could mean a hike in lending rates," said HDFC Bank Chief Economist Abheek Barua.