The Hindu Business Line : Loans set to become dearer

In action mode
Repo increase to come into effect immediately.
CRR hike in 2 tranches, to suck out Rs 19,000 crore.
Liquidity seen getting tighter; bank margins may be hit.

Our Bureau

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Mumbai, June 24 Corporates and individual consumers, who are already bearing the brunt of high prices and input costs, could soon be paying more for their loans.

Interest rates are set to go up further with the Reserve Bank of India on Tuesday hiking both repo rates and Cash Reserve Ratio by 50 basis points each.

While the repo rate has been hiked with immediate effect to 8.50 per cent, the CRR will be hiked in two tranches, to 8.5 per cent on July 5, and to 8.75 on July 19.

The double-stroke anti-inflationary measures are expected to tighten the liquidity in the system, as the CRR hike would suck out around Rs 19,000 crore.

CRR is the proportion of deposits mobilised by banks and parked with the RBI for statutory requirement.

Banks do not earn any interest on the cash reserves. Repo rate is the rate at which RBI lends money to banks.

Clear signal

Most bankers said they would have to take the cue from the RBI signal, which is very clear and on expected lines.

The last time RBI hiked repo rate was on June 11, by 25 basis points to 8 per cent. The CRR was last hiked in April 2008.

With inflation touching 11.05 per cent as on June 7, the highest in 13 years, the RBI had indicated immediate measures to combat inflation. In fact, the Governor, Dr Y.V. Reddy, had meetings with both the Prime Minister and the Finance Minister on Saturday.

In a statement issued late on Tuesday, RBI said, “At this juncture, the overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.”

The hike in the repo rate, the second this month, is a definite indication to banks to hike lending rates, as it makes raising funds more expensive, said an analyst.

Costs to rise

Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India, said that both the cost of deposits and lending rates are set to rise.

“Banks will have to take a balanced view and examine the impact of inflation before loading an increase in interest rates so that their asset portfolio is not impaired. Banks will now have to live with lower net interest margins,” he said.

‘Brakes on growth’

Mr D.K. Joshi, Director and Principal Economist, Crisil, said that the RBI had now slammed the brakes harder on the economy’s growth. “The RBI’s move is not aimed at reducing the current inflation rate, but more on stemming inflationary pressures which could have an impact in the future.

“Monetary measures can work with a lag of one year and this move could have a sharp impact on GDP growth next year. This year, GDP growth could be in the range of 7.5-8 per cent,” he said.

The increase in interest rates will, however, aid the appreciation of the rupee and improve interest rate arbitrage for foreign investors. However, post sub-prime crisis, the risk appetite of global investors remained low, Mr Joshi said.