Call it the big squeeze. The Reserve Bank on Tuesday hiked the interest at which it lends to banks — the repo rate — by 0.50 percentage points to tame inflation, for the 11th time in 16 months, causing instalments on home loans to go up yet again.
It also had a strong message in its quarterly review of the monetary policy: Prices will remain high, at least in the near term.
Almost immediately, private sector Yes Bank raised its base rate or minimum lending rate by 0.50 percentage points. Other banks are expected to follow suit within the next week.If you are a borrower of home loans on floating rates, the RBI move will crunch it to a point where there’s no option but to increase the instalment amount, and in some cases stretch the tenure. An EMI on a Rs 20 lakh home loan payable over 20 years will increase to Rs 19,967 from Rs 19,300 if the interest rate goes up from 10% to 10.50%.
Costlier borrowings will also prompt consumers to defer purchase of goods such as cars that are mostly bought through loans.
Existing car loans, however, are unlikely to be affected as these are on fixed interest rates.
“The rate hike will have to be passed on to customers,” said Pratip Chaudhuri, chairman, SBI. “Interest rates will go up,” said HDFC Bank MD Aditya Puri.
Expectedly, the RBI’s announcement evoked adverse reactions from investors.
The Sensex plunged the most in five weeks, shedding 353 points on the back of heavy selling of bank and interest-sensitive stocks.
Policy makers are facing an acute dilemma as the series of fiscal and monetary measures to cure inflation has not tamed the price monster, but has cast side-effects on the broader economy’s growth.
The RBI acknowledged that underlying inflationary pressures remained strong even as risks to growth were emerging.
“Inflationary pressures are clearly very strong,” RBI governor D Subbarao said. “There are signs that growth is beginning to moderate, particularly in respect of some interest-sensitive sectors.”
Finance minister Pranab Mukherjee said the rate hike would help cool prices. “With this policy adjustment, we will be able to get back to a more comfortable inflation situation that takes us to the year-end inflation level of 6% to 7%,” he said.