State Bank of India, the country's largest lender, on Tuesday joined other banks in raising its benchmark lending rate in a move analysts said was likely to temper a blistering pace of loan growth.
SBI, which owns nearly a quarter of banking sector assets in India, said it was lifting its benchmark lending rate half a percentage point to 11.5 per cent from Wednesday.
Loans to companies and individuals have been growing at an annual rate of about 30 per cent this year and in an attempt to rein in easily available cash, the central bank announced on December 8 to increase Cash Reserve Ratio (CRR) - the amount, banks are supposed to keep as cash.
Many private sector banks have already raised lending rates but state-run SBI's reach, with 13,000 branches including associates, makes its increase one of the most significant, even though its benchmark rate is still below other banks.
"This (the rate increases) would certainly reduce the topline loans growth," said Madhur Rao, analyst at Macquarie Research.
"The effect of these increases would be felt in the next quarter."
The central bank has used various measures this year to contain inflationary pressures due to high oil and food prices, including raising its short-term lending rate by 100 basis points to 7.25 per cent.
On December 8, it changed tack and opted to increase the cash requirement in two 25-basis point stages, on December 23 and January 6, as a way of targeting surplus funds in the banking system.
In response, Indian banks have raised their lending rates by 150 to 200 basis points this year to protect their net interest margins. ICICI Bank's benchmark lending rate stands at 13.75 per cent and HDFC Bank's at 13 per cent.
Loans are growing at an annual rate of about 30 per cent for the third year running, fuelled by low interest rates and more affluent middle classes who have been buying homes and cars.
Companies, which have been riding annual economic growth of more than 8 per cent, are also expanding capacity to feed demand.
But some consumer price measures showed inflation was running at more than 7 per cent annually in October, while the closely tracked wholesale price index is up 5.3 per cent.
Indian banks have raised deposit and lending rates gradually but they have not acted every time the central bank has tightened policy and much cash has poured into shares and property.
Property prices have gone up more than 40 per cent in some cities and the stock market has risen 45 per cent, fuelled both by foreign investor funds and domestic investment.
SBI's lending rate increase is also due to the rising cost of funds for banks, which are paying more for deposits as a way to attract investors away from the stock market.
"We have seen a rise in deposit rates and that has to translate into lending rates," said N Sethuram, chief investment officer at SBI Funds Management. "That could put pressure on loans growth."
Demand for loans has been growing faster than deposits. Data from the central bank shows loans grew an annual 29.1 per cent in the week ended December 8, while deposits grew 22.4 per cent.
SBI made the announcement after the market closed. Its shares ended 2.6 per cent up at Rs 1,245.90 in a firm Mumbai market.