Interest rates on home and retail loans are expected to rise, as a fallout of Reserve Bank today announcing a 0.5 per cent hike in Cash Reserve Ratio (CRR) to squeeze money supply to rid the economy of inflation.
The CRR, the amount of funds banks are required to park with the apex bank, has been raised to 8 per cent to suck out Rs 18,500-crore liquidity from the system.
Since banks would be left with less cash to lend and have to source funds at a higher cost, including by raising deposit rates, they may increase lending rates that will in turn temper demand and cool inflation that is at a three-year high of 7.14 per cent.
The CRR would be hiked by 0.25 per cent from April 26 and by an identical percentage from May 10.
Year-on-year inflation, which was 3.83 per cent during the last credit policy in January, had gone up to 7.41 per cent on March 29 before marginally falling to 7.14 per cent on April 5.
In the light of the current macroeconomic monetary and anticipated liquidity conditions and with a view to containing inflationary expectations, it is essential to take appropriate action on an urgent basis, an RBI release said here.
Bankers said the move was expected but would wait and watch the credit policy to be unveiled on April 29 before taking a call on interest rates. However, some of them felt they were left with very little option but to hike their rates with the cost of funds going up following the CRR increase.
The CRR hike comes within a day of Finance Minister P Chidambaram assuring the Lok Sabha that RBI will assess the monetary situation and take appropriate action.
Only on Wednesday, China's central bank had hiked its CRR by 0.5 per cent to a record 16 per cent to cool the economy.