Home & auto loans to get costlier as RBI hikes interest rate by 25 bps

MUMBAI: All loans are set to become costlier as the Reserve Bank on Tuesday increased the key interest rate by 25 basis points to check rising prices, at the risk of sacrificing some growth.

This is the 13th time the central bank has increased the interest rate since March, 2010.

In a major policy decision, the Reserve Bank of India (RBI) Governor Duvvuri Subbarao also deregulated savings bank deposit rates with immediate effect, a step that could fetch better returns for deposits as banks would have to compete to attract depositors.

With today's increase, the repo rate (at which RBI lends money to banks) has gone up to 8.5 per cent, while the reverse repo (a rate at which banks park their funds with RBI) would remain at 7.5 per cent.

On the economic growth, RBI lowered its forecast to 7.6 per cent for the current fiscal, down from its earlier projection of 8 per cent.

Commenting on RBI's rate hike, leading bankers indicated that they will raise interest rates following the increase in cost of funds for banks.

"Changing the policy stance when inflation is still far above the tolerance level entails risks to the credibility of the Reserve Bank's commitment to low and stable inflation," the policy document said, even as it admits that growth momentum has slowed down.

It said inflation, at present ruling near the double-digit mark, will start cooling by December this year and is likely to come down to 7 per cent by March, 2012.

RBI has kept bank rate and cash reserve ratio (CRR) unchanged at 6 per cent each, while retaining the statutory liquidity ratio at 24 per cent. The Reserve Bank would be separately issuing operational guidelines on interest rate on savings bank accounts.

Earlier in April, the RBI had floated a discussion paper on 'Deregulation of Savings Bank Deposit Interest Rate'. The discussion paper had spelt out the pros and cons of deregulating interest rate on the savings bank deposit.
The discussion paper had evoked wide-ranging responses from a cross-section of stakeholders. There were suggestions for and against deregulation.

"On balance, it is felt that the time is appropriate to move forward and complete the process of deregulation ...." RBI said.