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RBI hikes repo rate by 0.25 pc

With the Reserve Bank hiking its short term lending rate by 0.25 pc, banks may be forced to hike interest rates and help check inflation.
None | By HT Correspondent
UPDATED ON JUN 12, 2008 02:20 AM IST

Reserve Bank of India (RBI) raised the repo rate (the rate at which RBI lends to banks) by 25 basis points to 8 per cent from 7.75 per cent, the first such hike since March 2008. This is a clear signal for commercial banks to raise their lending and deposit rates, or so the central banker wants. Individual and corporate borrowers have to shell out more from now on.

RBI governor YV Reddy a few days back hinted about the need for tightening of money supply to attack inflation, which is threatening to derail the economy. "RBI probably took a pragmatic view by raising the repo rate only by 25 basis points despite rising inflation," said Deepak Parekh, chairman, HDFC. "This is set to increase the borrowing costs for banks. Short-term costs will go up."

Will it impact home loan rates immediately? "We will probably look at the possibility of increasing the rates in the near-term," Parekh said. HDFC will decide whether to raise home loan rates in the last week of June. "It is a clear indication of interest rates moving up," was the immediate reaction of MV Nair, chairman and managing director, Union Bank of India.

"On a review of the current macroeconomic and overall monetary conditions and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis," an RBI press release stated on Wednesday.

"The 0.25 per cent repo rate hike is a moderate interim measure," said MS Sundara Rajan, chairman and managing director, Indian Bank adding. "However, I do not foresee a possibility of rates moving up." Indian Bank’s 1-year deposit rate is at 8.5 per cent and the benchmark prime lending rate at 12.5 per cent. Rajan said the bank will hold on to these rates for now.

The decelerating growth of credit dispensation is expected to prevent banks from hiking the lending rates immediately, but that will only be postponing the inevitable.

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