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- PHOTO: S. RAMESH KURUP

Financial experts say the repo rate has been hiked as a weapon against the runway inflation, which is feared to touch the two-digit mark. The move to increase the repo rate, at which the RBI gives short-term money to banks in exchange of government securities, has been taken for the first time this financial year.

“Thus, banks will have no option but to increase the interest rates depending on their portfolios. Loans pertaining to housing, auto and consumer will become costlier,” says R. Vikraman, Manager, Punjab National Bank, Kozhikode.

The RBI had no choice but to hike the lending rates to banks as the rate of rise in prices touched a 45-month high at 8.24 per cent. The apex bank had attempted to curtail the inflation by twice raising, in three phases, the cash reserve ratio (CRR), the mandatory deposits that banks keep with the RBI. “But that did not have any positive affect. Even if the RBI hiked the repo rate further, it would not be surprising,” says K.K. Ajith Kumar, Chief Manager, Federal Bank, Kozhikode.

At the time of its annual policy announcement on April 29, the RBI had raised the CRR by 25 basis points to 8.25 per cent.

Leading bankers say that lending institutions need to maintain profitability. So, their burden will obviously be passed on to their clients. Retail portfolio, particularly housing loans, of some public sector, nationalised and private banks is 40 per cent. All banks are likely to take a decision soon, Mr. Vikraman says.

The RBI, while hiking the short-term lending rate (repo rate), has left the reverse repo rate, which is the rate at which the RBI borrows from banks, untouched.

The inflation is expected to climb over nine per cent once hike in petroleum prices gets reflected in the official wholesale price index, he says.

Mr. Ajithkumar feels that the crude oil rates are likely to increase to $150 a barrel in the near term resulting in further rise in inflation. If the banks increase the lending rates, it will naturally hit the housing sector as well. It was thought that the realty sector will not be affected when the RBI hiked the CRR.

“Certainly, the repo rate hike will have an adverse impact on the housing sector. The available funds decrease. The available funds will be costly,” says K.P. Rajashekaran, Assistant General Manager, State Bank of Travancore.

However, genuine buyers will go for housing loans. Speculators will be the most affected as the meltdown in the real estate industry is certain for the next few months. The outcome is evident from the plummeting share prices of real estate companies and banks.

The realty index touched a 52-week low this week. It plummeted 5,752.22 points this year. The index was 13,848.09 on January 8 and it was 7,891.10 on May 9. Attractive stocks such as those of DLF Ltd. and Shoba Developers suffered losses on the bourses. These went down below the initial public offerings. Likewise, Puravankara Projects and Omaxe stocks traded far below the IPO. Unitech Ltd, Housing Development and Infrastructure Ltd, Phoenix Mills and Ansal Infrastructure dwindled in the highly volatile market this month.

The real estate sector will have a tough time in Kozhikode too. Housing loans will come down if the banks decide to hike interest rates. If the loans showed a substantial jump of 15- 20 per cent when the rates were reduced a few years ago, the reverse process can happen. Both the CRR hike and the repo rate hike will reduce lending to commercial sectors, groups and individuals.

The Banking stock index also shed several points this month. The index fell over seven per cent last week. ICICI Bank, HDFC Bank, SBI, Indian Overseas Bank, Bank of Baroda, Andhra Bank, Canara Bank, Federal Bank and Indian Overseas Bank were down for over a fortnight. Many believe that the downward trend across markets is said to be dragging down these stocks. One can only hope that the banks take a cue from the government policies. Though India is a growth economy, it has to depend on global economies. India has already integrated with global economy, Mr. Ajithkumar says.

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