Home, auto loans to turn dearer, says bankers

The Reserve Bank's decision to hike key policy rates by 25 basis points will make auto, home and other loans more expensive, as lenders will have choice but to pass on the additional cost to consumers.

The rate hike is expected to be passed on to consumers, said ICICI Bank Managing Director Chanda Kochhar.

"The RBI steps are on expected lines as inflation still remains stubborn and poses a serious threat to growth," Union Bank of India Chairman MV Nair said.

He also said the bank will pass on the rate increase to customers "as credit growth has so far been robust this quarter". However, he refused to specify how soon the base rate hike would be effected.

The RBI has raised the short-term lending (repo) rate by 25 basis points to 7.50 per cent and the short-term borrowing (reverse repo) rate will move up by a similar margin to 6.5 per cent.

More Expert Views on the RBI rate hike

Subsequently, the interest rate under the Marginal Standing Facility, an additional borrowing window, has gone up to 8.5 per cent from the earlier level of 8.25 per cent.

"It will (25 basis point hike) put pressure on the short-term deposit rates and subsequently on the lending rate," said Indian Overseas Bank Chairman Director M Narendra.

However, the rate hike by banks may not be immediate, as credit offtake has started moderating, he said.

Echoing a similar view, IndusInd Bank Executive Vice-President Moses Harding said the rate hike will push the shorter end of the rate curve with higher inversion into the longer end.

Bank of Baroda Executive Director RK Bakshi, too, said the RBI move was expected, as inflation has become a serious threat to growth.

Bakshi also hinted at the possibility of a base rate hike by his bank, saying though no automatic hike will be effected, the bank will act according to the liquidity condition, which he termed as comfortable as of now.

Complete Coverage: The RBI rate hike

According to Punjab & Sind Bank Executive Director PK Anand, there will not be any knee-jerk reaction from the banks, as the rate hike was on expected lines.

IDBI Bank Executive Director R K Bansal said the market was expecting the hike and this may not result in banks increasing rates immediately.

In the last one-and-a-half months, several banks have revised lending and deposit rates following the annual policy announcement last month. Monetary transmission has been quite strong, with 45 scheduled commercial banks raising their base rates by 25-100 basis points after the May 3 policy.

Cumulatively, 47 banks raised their base rates by 150-300 basis points during the July, 2010-May, 2011, period, the RBI said, adding that the higher cost of credit is restraining credit growth. However, it still remains fairly high, suggesting that economic activity is holding course. MORE