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Your EMIs may go up

india Updated: Sep 13, 2010 01:43 IST
HT Correspondent
HT Correspondent
Hindustan Times
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You could be in for another jolt on your equated monthly installments (EMIs) on your loans.

The Reserve Bank of India is due to have its first mid-quarter policy review on Thursday but before that, the government will release the consolidated monthly inflation data for August that could set the tone for a decision to raise interest rates that bankers may be forced to respond to.

Economists expect the central bank to announce another round of policy rate hikes that may not be good news for home and consumer loan customers.

Rising demand could further fan prices of products pushing up wholesale prices based inflation that is hovering around 10 per cent. Overall inflation data for August will be released on Tuesday, while the weekly year-on-year inflation for food products released every week stood at 11 per cent last week.

"Given that inflation remains the key policy priority, we expect the RBI to hike the repo and reverse repo rates another 0.25 percentage points. We see an outside chance of the reverse repo rate being raised 0.50 percentage points, depending on the RBI's outlook for liquidity," said Rahul Bajoria, regional economist, Barclays Capital.

The repo is the short-term rate at which the RBI lends to banks while the reverse repo is the rate it pays to banks for funds parked with it.

In July RBI had increased the repo rate by 0.25 percentage points to 5.75 per cent. It had also increased the reverse repo rate by 0.50 percentage points to 4.5 per cent

A higher repo raises the banks' borrowing costs prompting them to raise interest rates it charges on loans for automobile purchases, corporate projects and home building. A higher reverse repo means RBI would suck cash from the system to stymie demand and cool prices.

"Demand is quite high and there will be an attempt from the central bank to cool off, we can expect a 0.25 percentage point hike in the repo rate, though liquidity remains tight," former director of Indian Council for Research in International Economic Relations (ICRIER) Rajiv Kumar told Hindustan Times.

"We are looking at a moderate rate hike in the review," said Sonal Varma, V-P, Nomura Financial Advisory and Securities (India) Pvt. Ltd.