RBI hikes key rates by 0.25%; home, auto loans may cost more

Written by: Pti
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New Delhi, Jan 25 (PTI) Home, auto and loans to corporatemay become costlier as RBI today hiked short-term lending andborrowing rates by 0.25 per cent each, though bankers feltthere may not be an immediate increase in interest rates.

These initiatives (hike in rates) are aimed at checkingprice rise while retaining the growth momentum, RBI said whileraising the year-end inflation projection to 7 per cent andretaining the economic growth forecast for the fiscal at 8.5per cent.

The short-term lending (repo) rate has been increased to6.5 per cent while the borrowing (reverse repo) rate has goneup to 5.5 per cent. The Reserve Bank of India (RBI) alsoextended the additional liquidity support facility to bankstill April 8, 2011.

It has retained the Cash Reserve Ratio (CRR)-- a portionof deposits that banks are required to maintain in cash withthe RBI-- at 6 per cent to ensure that the system had enoughliquidity to meet loan requirements.

"The policy rate hikes will not result in immediateincrease in lending and borrowing rates of banks as this hasalready been factored in by the market given high inflationarypressures," Oriental Bank of Commerce Executive Director S CSinha told PTI.

He, however, added that banks may have to increase therates in case the credit off-take goes up.

The RBI will constantly monitor the credit growth and, ifnecessary, will take necessary steps, according to thirdquarter monetary policy review announced today.

The Reserve Bank projected an economic growth of 8.5 percent with an upside bias.

It also warned that inflation is a matter of concern andrevised its projection for FY 2011 to 7 per cent from 5.5 percent earlier.

The central bank in 2010 raised the key policy rates sixtimes to contain inflation which shot up to 8.43 per cent inDecember on high prices of food items, from 7.48 per cent inNovember.

While the food inflation for the week ended January 8stood at 15.52 per cent. It had soared to 18.32 per cent inthe end of December on high prices of vegetables, includingonion.

The policy measures, the RBI said, will "rein inrising inflationary expectations, which may be aggravated bythe structural and transitory nature of food price increases."

It, however, asserted that the monetary action was aimedat taming rising inflationary expectations, while at the sametime being moderate enough not to disrupt growth.

It also aims to contain the spill-over from rising foodand fuel prices to generalised inflation and continue toprovide comfort to banks'' liquidity management operations, RBIsaid.

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