Home, auto and personal loans are set to become dearer still. Banks are expected to raise lending rates with the Reserve Bank of India hiking its key short-term rates on Thursday.
Besides retail borrowers, micro, small and medium enterprises too could feel the pinch.
The central bank hiked the repo rate (at which the RBI lends funds to banks) 25 basis points to 7.50 per cent with immediate effect to tame inflationary pressures in the economy.
The reverse repo rate (the interest paid by the RBI to banks on surplus funds parked with it) automatically got adjusted upwards to 6.50 per cent from 6.25 per cent.
Though the wholesale price index in May climbed to 9.06 per cent (against 8.66 per cent in April 2011), economists say the lacklustre industrial output in April may have prompted the central bank to settle only for a 25 basis points hike in repo rate. The Index of Industrial Production reading was sharply lower at 6.34 per cent in April 2011 (13.1 per cent in April 2010) due to poor growth in consumer goods, manufacturing and consumer goods sectors.
More hikes on the cards
Since February 2010, the RBI has increased repo and reverse repo rates 10 times in response to rising inflationary pressures. Cumulatively, the repo and the reverse repo rates have been increased by 275 basis points and 325 basis points respectively.
In its Annual Policy, announced last month, the RBI took a ‘large step', hiking the repo and reverse repo rates by 50 basis points each. This led bankers and economists to then conclude that the RBI had abandoned its ‘calibrated and baby-step' approach to increasing interest rates.
Underscoring the fact that the challenge of containing inflation and inflationary expectations persists, the central bank said, its monetary policy stance remains firmly anti-inflationary. What this means is that more rate hikes are in the offing. Under the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control, the RBI said. While bankers ruled out an immediate hike in deposit rates (as they have been marked up significantly over the last couple of months), lending rates could go up as banks will try to protect their margins in the first quarter.
This time around the hike in lending rates could pinch home loan, auto loan and personal loan borrowers as they generally have fixed income, said Mr M.V. Nair, Chairman and Managing Director, Union Bank of India. Similarly, small and medium enterprises could also be impacted, with their profit margins coming under pressure.
The RBI's move to increase key rates and the prevailing systemic liquidity conditions could lead to an increase in funding costs for banks, which in turn could push up lending rates, said Ms Chanda Kochhar, Managing Director and CEO, ICICI Bank.