EMIs set to go up post RBI interest rate hike

EMIs for home, auto and personal loans are set to go up again as the Reserve Bank on Thursday hiked key interest rates by 25 basis points, 10th time in the last 15 months, in its effort to rein in high inflation. Sacrificing growth, the RBI raised the short-term lending (repo) and borrowing (reverse repo) rates by 25 basis each to 7.5% and 6.5%, respectively.

Leading bankers said interest rates would harden further as cost of funds has become costlier. "This measure and the prevailing liquidity conditions could lead to an increase in funding costs for banks and in lending rates," ICICI CEO and MD Chanda Kochhar said.

In its mid-quarter review of credit policy, RBI noted that as many as 47 banks have raised their base lending rates by up to 300 basis points (or 3 percentage points) between July 2010 and May 2011. For Rs 30 lakh home loan for 20 year tenure, for instance, the 3% point hike would translate into about Rs 4,500 more in EMI.

The central bank also indicated that borrowers' woes may not end here as it "will need to persist with its anti-inflationary stance of monetary policy". For this sacrificing growth in the short term may be 'unavoidable'. Current inflation measured by WPI is hovering over 9% for the month of May this year.

 Finance Minister Pranab Mukherjee endorsed the Reserve Bank of India (RBI) stance stating, "We need to have price stability for sustaining growth in the medium term."

 Expectedly disappointed industry said the RBI move would hurt growth and have a negative impact on investment sentiments. The share market too showed disapproval with the BSE-Sensex shedding 146 points to end below 18,000-mark.

Following the second rate hike by RBI in 45 days, index of banking shares bankex declined by 66 points on fears of pressure on margin. In a bid to protect the margin, banks are expected to pass on the rate hike sooner than later.

In the last one-and-a-half months, several banks have revised lending and deposit rates following the annual policy announcemen. Monetary transmission has been quite strong, with 45 banks raising their base rates by 25-100 basis points after the May 3 policy. Following the revision in repo, the interest rate under the Marginal Standing Facility, an additional borrowing

window, has gone up to 8.5% from the earlier level of 8.25%. Going forward, the RBI would continue its tight monetary policy stance in a bid to rein inflation which is much above the comfort level. "Based on the current and evolving growth and inflation scenario, the Reserve Bank will need to persist with its anti-inflationary stance of monetary policy," RBI said.

 "Domestically, inflation persists at uncomfortable levels. Moreover, the headline numbers understate the pressures because fuel prices have yet to reflect global crude prices," it said.