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Quantum of RBI hikes takes markets by surprise

Oommen A. Ninan

Housing, car and personal loans will become dearer
Message to raise interest rates is
loud, unambiguous

MUMBAI: The hike in key rates announced by the Reserve Bank of India on Tuesday is expected to result in a 25-50 basis points increase in the Prime Lending Rates (PLRs) of banks; the deposit rates for customers are also likely to increase in the present scenario.

In its policy, the RBI has accorded top priority to managing inflation and inflationary expectations. To mitigate the inflation level, which is hovering around 12 per cent, it felt the need for further tightening the monetary policy by raising the Repo rate — the rate at which the RBI lends money to banks — by 50 basis points, and hiking the Cash Reserve Ratio (CRR) — that portion of deposit banks must keep aside — by 25 basis points.

While the overall direction of the monetary policy was along expected lines, the quantum of rate hikes took the markets by surprise.

The RBI has hiked the repo rate by 125 basis points and the CRR by 150 basis points since April this year.

The RBI has maintained a projection of 8 per cent GDP growth for 2008-09 even in the context of giving top priority to inflation management to bring it down to 7 per cent by fiscal-end.

Impact

The announcements by the central bank are likely to have a huge impact on interest-sensitive sectors such as banking, realty and automobile, while loans for housing, car and personal purposes will become dearer.

“Markets tend to react conservatively when faced with such tightening policies from the central bank. So it is not entirely surprising to find the interest rate structure of the banking system going through a dynamic review and adjusting [itself] to the evolving market realities,” said Chanda Kochhar, Joint Managing Director, ICICI Bank.

Banks will increase their PLRs which will in turn raise their lending rates for housing, automobile and personal loans. They will raise their deposit rates as well, but possibly to an extent lower than the hike in PLR.

“Going by the hike announced by the RBI, it could be in the range of 25-50 basis points in PLR. But the hike could be higher depending on the bank,” said Joydeep Sen, vice-president, Advisory Desk, BNP Paribas Private Banking.

This calendar year has already seen home loans go up by around 100 basis points. The Housing Development Finance Corporation, among other major home lenders, raised rates last July. But another bout of hikes is clearly on the anvil.

The message to raise interest rates is loud, clear and unambiguous. “I think banks will raise interest rates and slow credit expansion; these two things are expected as a result of the policy announcement,” said D.K. Joshi, Principal Economist, Crisil.

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