RBI hiked repo rates, banks to raise home and auto loans by 25-50bps

The Reserve Bank of India’s (RBI) has hiked its key policy rates —repo rate (the rate at which it lends to commercial banks) by 25 basis points (bps) to 6% and reverse repo rate (the rate at which banks park excess cash with RBI) by 50 bps to 5%. As a result in October, consumers will have to pay more on home and auto loans. The bankers will be raising lending rates anywhere between 25 and 50 basis points. One basis point is equal to one hundredth of a percentage.

There is good news for investor’s banks will be increasing deposit rates as the banks have been witnessing sluggish growth in deposits at just about 14%.

SS Ranjan, chief financial officer, State Bank of India, said, “RBI move clearly signals an upward bias on interest rates. We will decide on a possible revision in rates in our asset and liability committee (ALCO) meeting,'' and added, “The quantum of the rate hike will depend on how the cost of funds and demand for credit pans out.''

MV Nair, chairman and managing director, Union Bank of India, said, “We expect credit demand to pick up in October as the busy season kicks in and there will be pressure on liquidity which will lead to rise in interest rates. We will review our base rate and benchmark prime lending rate in October.''

Dipak Gupta, executive director, Kotak Mahindra Bank, pointed out, “Interest rates will move up and we may increase our interest rates both deposits and lending to 25 basis points.''

http://static.expressindia.com/expressindia/newpic/nor.jpgAccording to Ashish Parthasarthy, head (treasury), HDFC Bank, “There is every possibility that base rate will be revised to the extent of 25-50 basis points.'' There would be another round of deposit rate hikes of 25 basis points across the board but not immediately.”

According to Keki Mistry, vice-chairman & CEO, HDFC, increase of 25bps in repo rate will not have any significant impact on long term rates. “Immediately there will be no increase in rates as the market had factored in a 25 basis point hike in repo rate. I expect RBI to now take a pause as inflation is easing,'' said Mistry.

The Housing Finance Company- which is facing tuff competition from public sector bank like State Bank of India- has recently introduce a dual rate home loan product. Under this scheme company is offering a fixed interest rate of 8.50% per annum up to March 31, 2011and of 9.50% for period between April 1, 2011 and March 31, 2012 and consequently the interest of rate of the remaining loan tenure will be at a floating rate.

PC John, executive director, Federal Bank, points out, “Overall interest rates are likely to go up. We may increase our deposit and lending rates to the tune of 25-50 basis points. At the same time, if credit demand does not pick, it would not be feasible to hike interest rates upfront.''

On the other hand RVS Sridhar, president and head, global markets, Axis Bank, said, “We believe any further rise in deposit and lending rates will be limited. Deposit rates already moved up in anticipation of RBI rate hikes in the last 1-2 months. It may not be necessary to hike rates immediately.'' “The question of increasing lending rate comes in when our cost of funds goes up. However, we need to keep watch on industry trends and if needed, would revise interest rates,'' added Sridhar.

MD Mallya, chairman and managing director, Bank of Baroda also confirmed his bank will review the base rate by the end of the quarter.

To control the rising inflation the central bank has raised the policy rates for the fifth time this year in its first mid-quarter review of the monetary policy. The RBI in its press release said, “Inflation remains the dominant concern in macroeconomic management.”

In August the wholesale price base inflation had increased to 8.5% from a year earlier, while in July it was at 9.8%, the commerce ministry told on September 14. The hike in repo rates will result in rise in cost of funds for the banks and in long term the loans become expensive. Bankers are expecting to raise lending rates by 25-50 basis point when the base rate will be reviewed in October.

By the end of August 27, 2010, there was a slip in lending to corporate and individuals by commercial banks. It had slipped little below 20% , the target set by the Reserve Bank of India in 2010-11. However, in August most of the commercial banks had hiked their deposits and lending rates in the range of 25-75 basis points. The banks raised the rates after RBI had hiked the repo rate by 25 basis points to 5.75% and the reverse repo rate by 50 bps to 4.50% on July 27.