Loans may cost more as RBI hikes key rate to check inflation

Mumbai, Jan 28: EMIs for home and auto loans may rise after Reserve Bank Governor

unexpectedly raised a key policy rate by 0.25 per cent today to fight inflation.

The RBI, in its Third Quarter Review of Monetary Policy, increased the short-term lending (repo) rate to 8 per cent from 7.75 per cent and indicated a pause in terms of further rate hikes. The central bank lowered its growth forecast for the current financial year to less than 5 per cent from 5.5 per cent and said inflation will continue to hover around 8 per cent in the next fiscal.

"...an increase in the policy (repo) rate by 25 basis points is needed to set the economy securely on the recommended disinflationary path," Rajan said.

Consequently, the reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent.

However, the RBI kept the cash reserve ratio unchanged at 4 per cent as liquidity seems to be comfortable. It was widely expected that Rajan would maintain the status quo on rates to support growth. Ahead of the quarterly review, Rajan had termed inflation a "destructive disease."

While industry expressed its "disappointment," bankers said they will take a view on raising interest rates, depending on demand for credit and other factors. The asset liability committee of the country's largest lender State Bank of India will review interest rates shortly.

"While the Governor has given a repo rate increase, he has clearly said that this could be end of the tightening cycle," SBI Chairperson Arundhati Bhattacharya said.

"As of now it (interest rate hike) looks unlikely, but we need to look at the overall data and then take a decision," SBI Managing Director A Krishna Kumar said. Commenting on the policy, Ficci said,

"Rise in repo rate has disappointed industry...We also hope the banks will not hike the lending rates as this would scuttle revival."

PTI