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Loans to turn more costly

india Updated: May 02, 2011 01:39 IST
HT Correspondents
HT Correspondents
Hindustan Times
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Expect one more round of increases in your loan installments.

With inflation hitting a 16-year high of 9.43% in 2010-11, the message is clear for the Reserve Bank of India (RBI), which is expected to raise interest rates in its monetary policy review on Tuesday. If it does, it would be the ninth increase in 13 months.

In March, RBI had increased the repo and reverse repo rates — the signals it uses for commercial banks — by 0.25 percentage points each to 6.75 % and 5.75 % ,respectively.

A higher repo, the rate at RBI lends to banks, pushes up banks’ borrowing costs prompting them to increase interest rates for companies and retail borrowers such as home loan customers.

A higher reverse repo — the rate at which the RBI absorbs excess cash — means the central bank sucks out more cash to stymie demand and cool prices. “We expect a 0.25 percentage point increases in the repo and reverse rates on May 3,” said Samiran Chakraborty, regional head of research (India) at Standard Chartered Bank.

While the broad expectation is of a quarter-point squeeze, there are some in Mumbai who wonder if the RBI could turn aggressive with a 0.5 point squeeze.

Chakraborty said he expected RBI to effect four cuts of a quarter-point each spread over its next four meetings until September.

The central bank has acknowledged that inflation pressures are up even as risks to growth are emerging.

India’s factory output rose 3.6% in February, marginally lower than the revised 3.7% expansion in the previous month.

"Growth is already moderating and aggressive rate hikes from here on will risk a far greater slowdown than what is needed especially since monetary measures work with a lag," said Rajeev Malik, senior economist at broking and research firm, CLSA, Singapore.