Mumbai, June 16 : Continuing its efforts to check price rise, the Reserve Bank today raised key short-term lending and borrowing rates by 25 basis points for the 10th time since March, 2010, a move that could make auto and home loans expensive.
While the short-term lending (repo) rate has been raised to 7.5 per cent, the borrowing rate has been hiked to 6.5 per cent.
Subsequently, the marginal standing facility (MSF) has also gone up by 25 basis points to 8.50 per cent.
Other rates and ratios have been kept unchanged.
The policy initiative, the RBI said, “is expected to contain inflation and anchor inflationary expectations by reining in demand side pressures.”
Inflation stood at over 9 per cent in May, much above the central bank's comfort level of 5-6 per cent.
The measures, the RBI said, would also help in mitigating the impact of “potentially adverse global developments.”
The central bank further said it would continue with its anti-inflationary stance to arrest price rise.
“Based on the current and evolving growth and inflation scenario, the RBI will need to persist with its anti-inflationary stance of monetary policy,” it said.
RBI's decision to hike key policy rates by 25 basis points will make auto, home and other loans more expensive, as lenders will have no choice but to pass on the additional cost to consumers. The rate hike is expected to be passed on to consumers, said ICICI Bank Managing Director Chanda Kochhar.
"The RBI steps are on expected lines as inflation still remains stubborn and poses a serious threat to growth," Union Bank of India Chairman M V Nair told PTI.
He also said the bank will pass on the rate increase to customers "as credit growth has so far been robust this quarter". However, he refused to specify how soon the base rate hike would be effected.
The RBI has raised the short-term lending (repo) rate by 25 basis points to 7.50 per cent and the short-term borrowing (reverse repo) rate will move up by a similar margin to 6.5 per cent.
Subsequently, the interest rate under the Marginal Standing Facility, an additional borrowing window, has gone up to 8.5 per cent from the earlier level of 8.25 per cent.
"It will (25 basis point hike) put pressure on the short-term deposit rates and subsequently on the lending rate," said Indian Overseas Bank Chairman Director M Narendra.
However, the rate hike by banks may not be immediate, as credit offtake has started moderating, he said.
Echoing a similar view, IndusInd Bank Executive Vice-President Moses Harding said the rate hike will push the shorter end of the rate curve with higher inversion into the longer end.
Bank of Baroda Executive Director R K Bakshi, too, said the RBI move was expected, as inflation has become a serious threat to growth.
Bakshi also hinted at the possibility of a base rate hike by his bank, saying though no automatic hike will be effected, the bank will act according to the liquidity condition, which he termed as comfortable as of now.
According to Punjab & Sind Bank Executive Director P K Anand, there will not be any knee-jerk reaction from the banks, as the rate hike was on expected lines.
IDBI Bank Executive Director R K Bansal said the market was expecting the hike and this may not result in banks increasing rates immediately.
In the last one-and-a-half months, several banks have revised lending and deposit rates following the annual policy announcement last month. Monetary transmission has been quite strong, with 45 scheduled commercial banks raising their base rates by 25-100 basis points after the May 3 policy.
Cumulatively, 47 banks raised their base rates by 150-300 basis points during the July, 2010-May, 2011, period, the RBI said, adding that the higher cost of credit is restraining credit growth. However, it still remains fairly high, suggesting that economic activity is holding course.
"There definitely can be one or two more hikes up to 50 bps in the pipeline, before inflation starts cooling from November," Narendra said.
Another public sector lender Allahabad Bank's Chairman and Managing Director, J P Dua, said with inflation over 9 per cent, the RBI move was very much on expected lines.
On whether his bank will pass on the rate hike to customers, he said, "It will depend on the liquidity condition", which he termed as comfortable now.
Asked if he expects another hike in the July quarterly review, Dua said it depends on inflationary pressures. He, too, said his loan-book has been as good as last year at around 20 per cent, led by infrastructure lending.
Private sector Kotak Mahindra Bank Treasury Head Mohan Shenoy said the money market had already factored in the hike.
The hike was inevitable as "the RBI feels that there is no evidence of a slowdown in inflation. So we expect another up to 50 bps hike spread over the next two policy announcements."
On the possible headwinds, he said the tricky global situation, especially the slowdown in the US and the lingering stress in the euro zone, will be the factors our policymakers will be watching keenly in formulating their next stance.
Shenoy hoped that banks do not pass on the hike immediately. PTI