RBI hikes rates: Get ready to fork out extra for your EMI

Concerned with high inflation, the central bank raised the benchmark short-term interest rates—repo by 25 bps and reverse repo by 50 basis points. "Inflation remains the dominant concern in macroeconomic management", RBI said in its press release.

Banks pay the repo rate to borrow from RBI and receive the reverse repo rate for parking surplus funds with the central bank. The repo rate is up from 5.75% to 6% while the reverse repo rate is up from 4.50% to 5% with immediate effect.

The hike in rates will lead to a rise in cost of funds for the banks and eventually makes loans expensive, which will reduce consumption. Experts had expected 25 bps hikes in both rates. This is the fifth rate hike this year.

Banks are now expected to hike lending rates following a rate hike by the RBI. According to Shailendra Bhandari of ING Vysya Bank there was a case for rates to go up before the policy was announced. “The way the formula goes, which primarily depends upon deposit rates, the current base rate is set for period July to September—and it would have used the deposit rates which were prevailing sometime around July—when this is reviewed next quarter almost by definition the formula will lead to some increase,” he believes.

If rates tend to go up the personal banking segment cannot remain totally untouched in such situation, says RK Bakshi, ED, Bank of Baroda.

However, most bankers maintained a cautious stance and said they would like to review conditions in detail before making any decisions. According to Albert Tauro, CMD of Vijaya Bank the signal is there for rates to be hiked. However, he believes, the banking industry will be in no hurry to hike rates as it is a quarter-end. "Rates may remain broadly at same rate till September 30. There could be definitely some upward revision in lending rate and deposit rates, minimum by 25 basis points," he adds.

S Shridhar, chairman and managing director of Central Bank feels lending rates will depend on what formula banks choose to adopt. “We had already increased our BPLR sometime back and we will review our base rate at the end of the month or beginning of October,” he informs.

BA Prabhakar, executive director at Bank of India says "We might consider passing on this hike, but we have to work it out. We don't see any immediate impact on banks. But certainly, the expectations from depositors will go up, so they would expect us to raise deposit rates by at least 25 basis points."

JP Dua, CMD of Allahabad Bank blames inflation for the unexpected hike in reverse repo. "The whole thing has come because of inflation. The worry on inflation is there with RBI. But we never expected a 50 basis point hike. We will have to look into it before taking any decision."