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Rebound vs lending rate bumps

india Updated: Aug 16, 2010 01:25 IST

The government’s macro-economic managers will be keenly watching two sets of data in the coming days — consolidated monthly inflation for July and interest rate announcements by banks — as policy makers look for options to contain prices without upsetting the growth momentum.

And it might not be good news for home and consumer loan borrowers as well. EMIs (equated monthly instalments) might go up as banks, taking a cue from the Reserve Bank of India’s (RBI’s) decision to increase policy rates, have begun raising interest rates.

The State Bank of India will decide on hiking interest rates in a couple of days, while Bank of India (BoI) has already said it will increase its lending rate by 0.5 percentage points for existing borrowers.

BoI’s decision came hours after Finance Minister Pranab Mukhjerjee expressed hope that lenders will not raise their rates in response to the RBI’s monetary tightening measures.

Punjab National Bank had increased its benchmark prime lending rate by 0.75 percentage points to 11.75 per cent, three days after the RBI increased the repo rate to 5.75 per cent.

The repo rate is the rate at which commercial banks borrow from the central bank. A higher repo raises the banks’ borrowing costs, prompting them to raise interest rates for final home, auto and corporate borrowers. Amid signs of a slowdown in industrial growth, India Inc feels inadequate credit availability would upset the growth momentum.

“RBI has started rolling out its monetary tightening measures, which can affect growth,” industry body Ficci said .

“On the policy front, we expect inflation concerns to lead the RBI to tighten the repo rate by 0.50 percentage points between now and March 2011,” said Sonal Varma, vice-president, India Economist Nomura Financial Advisory and Securities (India) Pvt. Ltd.