RBI ups key rate, loans to cost more | business | Hindustan Times
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RBI ups key rate, loans to cost more

Under relentless pressure to control inflation, the RBI takes the the move that could force banks to raise interest rates on loans to corporate and consumers.

business Updated: Jun 25, 2008 01:25 IST

Bad news for home loan borrowers: Get ready to shell out more in EMIs if yours is a loan taken on a floating rate.

The Reserve Bank of India on Tuesday increased the rate at which it lends to commercial banks in the short term — the repo rate — to 8.5 per cent from 8 per cent, in a bid to discourage consumer spending and rein in inflation that has surged to double digits. It also increased the share of deposits that banks must hold in reserves — the cash reserve ratio — to 8.75 per cent from 8.25 percent.

The central bank’s decision is expected to push commercial banks to increase their lending rates, including those on housing mortgages, by at least half a percentage point, bankers and experts said.

“At the outset, half a per cent (point) increase in lending rates looks likely,” said Keky Mistry, managing director of HDFC Ltd, the country’s largest housing finance company. “We will take a decision next week,” he said.

Vijaya Bank CMD Prakash P Mallaya said he expected similar raises.

If that happens, the monthly installment on a Rs 20-lakh loan with a 20-year tenure will increase by Rs 676. That means in a full year you will have to shell out Rs 8,112 more in interest.

Some experts, however, said home loan rates could go up by as much as 1 percentage point — although that is unlikely to come in one shot — because there would be pressure on banks to increase deposit rates.

Higher deposit rates coupled with a fall in liquidity will push up the cost of funds for banks, which, in turn, will try to pass it on to consumers. The pinch may get even bigger.