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Loan rates may go up again

The RBI is expected to hike both the repo rate and CRR in its first quarter review of the annual credit policy scheduled for Tuesday. BS Srinivasalu Reddy reports.

india Updated: Jul 27, 2008 20:16 IST
BS Srinivasalu Reddy

Floating rate home loan borrowers may have to brace up for another round of hike in their interest commitments. The Reserve Bank of India (RBI) is expected to hike both the repo rate (at which RBI lends banks) and cash reserve ratio (CRR or a portion of deposits banks have to keep with RBI) in its first quarter review of the annual credit policy scheduled for Tuesday.

“RBI may hike repo rate by 25 basis points (100 basis points equals one per cent) and CRR by 50 bps in the policy,” said DK Joshi, director and principal economist, Crisil. “High inflation and continued higher growth in money supply form a potent recipe for a tighter monetary policy.”

Repo rate hike will lead to general rise in interest rates in the economy, at times leading to resetting of equated monthly installments (EMIs) on flexible home and personal loans.

“There is a possibility of RBI holding the repo rate hike for a later date,” said Abheek Barua, chief economist, HDFC Bank. “But CRR will happen now.”

The main target for the RBI this time around would be an unbridled growth in money supply over the last two years, which also contributes to higher inflation.

Money supply had been growing at 20 per cent per annum despite RBI targeting to bring it down to 17-17.5 per cent. CRR hike by 50 basis points could cut back on the banks’ lendable resources by about Rs 19,000 crore.

Though inflation fell by two basis points to 11.89 per cent for the week ended July 12, 2008 (11.91 per cent for the previous week), it would continue to be the major bugbear of the economy for a few more months.

Drought experienced in the western region is set to impact cotton and oilseed prices. Steel prices may look up once the moratorium on price rise expires by this month-end.

Robert Prior-Wandesforde, an economist with the Hongkong and Shanghai Banking Corporation, Singapore, said in a report on India Economics and Strategy, “… our central forecast envisages the repo (and CRR) rising by 100bps to 9.5 per cent (and 9.75 per cent) by the end of calendar 2008.”

Global crude prices fell about 16 per cent from its peak to $124 per barrel over the last few days. Though this development will reduce the burden on domestic oil marketing companies like IOC, HPCL and BPCL, it may not offer any relief on inflation front. This is due to its direct impact on inflation being insulated by the Centre by keeping fuel prices artificially low.