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Will interest rates rise?

india Updated: Jun 20, 2008 21:30 IST
BS Srinviasalu Reddy
BS Srinviasalu Reddy
Hindustan Times
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With the inflation crossing 11 per cent, interest rates are set to rise, burning a hole in your pocket. The banks are expected to hike lending rates by at least one per cent soon. HDFC Bank has already hiked its prime lending rate (PLR) by 0.25 per cent. PLR is the interest rate that banks charge their most credit-worthy customers.

If you plan to take a loan, a higher rate would mean a higher equated monthly installment (EMI). In general, rate rises are good news for savers because deposit rates will go up. Banks are also planning to raise deposit rates by one per cent or more.

“Usually, deposit rates should be two per cent above the inflation. But the present situation being unusual, it should at least be at the level of inflation. Lending rates are usually, about three-four percent above deposit rates,” said DH Pai Panandiker, leading economist and president of RPG Foundation. The prime lending rates of banks are in the range of 12.75-13.25 per cent at present.

But bankers are cautious in their approach to raising rates. “We are watching the situation. We expect that inflation will moderate in coming weeks, having risen due to hike in petrol and diesel prices now. Based on one figure we may not react,” said MBN Rao of Canara Bank. “Inflation is expected to be above 11 per cent over the next three months. RBI may not be too aggressive. But, I think it may hike CRR first and hike Repo rate later,” Panandiker added.