Home, auto loans set to get costlier as RBI hikes key rates

If you were eyeing that dream house or a swanky set of wheels, prepare to shell out a little more. Home loans, auto loans and loans to businesses are set to get expensive with the Reserve Bank of India increasing its key policy rates by 25 basis points on Thursday. However, most banks are unlikely to increase rates before April-end and they may also not hike fixed deposit rates given the improvement in their funds position. 

This increase, the eighth in the last 12 months, takes the repo (rate at which it lends to banks against securities) to 6.75% and reverse repo (the rate at which banks place surplus funds with RBI) to 5%. Since banks borrow from RBI on a daily basis, any increase in the repo rate will increase the cost of funds for banks, forcing them to lend at higher rates. Soon after the policy decisions were announced, State Bank of India (SBI), the country's largest lender, said the higher rates "will have to be passed on to customers," signaling a higher rate regime. So, if the quarter percentage point hike is passed on to home loan borrowers it would result in monthly installments going up by Rs 153 for a 15-year Rs 10 lakh home loan. 

If it is any solace for the borrowers, most lenders say that they are likely to wait until April and review credit demand in the new fiscal before raising rates. The present rate hike is unlikely to benefit savers as banks say that deposit rates have already touched a peak and given the decent inflows into fixed deposit schemes and improvement in liquidity banks are unlikely to raise deposit rates. 

On a policy level, this may also not be the end of the road as far as RBI's rate hikes are concerned with the central bank not making any mention of when inflation-the main target of its rate hikes-is expected to moderate. In its third quarter review, RBI had projected WPI inflation for March 2011 at 7%. RBI also raised March-end inflation forecast to 8% from 7% earlier, leaving GDP growth forecast unchanged at 8.5%. But even if banks do not raise interest rates in the next two weeks there is a strong likelihood that they may be nudged into doing so by RBI in its monetary policy for the first quarter of FY 2011-12. According to analysts , inflation concerns far overshadow fears that growth will be hit. 

"We have no plans to increase our rates now. I believe that most lenders will wait until April before taking a decision on their lending rates," said Keki Mistry, vice chairman and CEO, HDFC. "Historically, interest rates peak in March because this is the month when 40% of tax payments for the year go out of the banking system. It is also the time when credit demand picks up." He added that while demand for funds eased in April, interest rate movement would be determined by whether crude oil prices ease. 

"Not only is the rate hiking cycle in 2011-12 now likely to be more extended than initially anticipated but is also likely to be far more front-loaded. We expect inflation to print in at 8.1% in March 2011 and move higher close to 9% by August 2011. We see the RBI hiking its repo and reverse repo by another 25 bps in its annual review in May and this is likely to be followed by 50-75 bps of rate increases through the fiscal year," said Abheek Barua, chief economist, HDFC BANK .

Source:- Economics Times