Home, auto loans to become costlier as RBI hikes key rates

Be prepared to pay more every month on your home, auto and other loans, as the Reserve Bank, for the 10th time since March, 2010, raised key interest rates by 25 basis points in its effort to control spiralling inflation.

The RBI has raised the short-term lending (repo) rate by 25 basis points to 7.50% and the short-term borrowing (reverse repo) rate will move up by a similar margin to 6.5%. It kept other rates and ratios unchanged.

The mid-quarterly policy initiatives, the RBI said, are expected to contain inflation, which is currently over 9%, much above the comfort level of the central bank.

"The RBI has sought to maintain an interest rate environment that moderates inflation and checks inflationary expectations," the Finance Ministry said in a statement, adding that this was on expected lines. "We need to have price stability for sustaining growth in the medium term," it added.

Bankers said the move would put pressure on interest rates and may make loans costlier subsequently. "It (RBI's move) will put pressure on short-term deposit rates and subsequently on the lending rates. But rate hike by banks would not be immediate," Indian Overseas Bank CMD, M Narendra, told PTI.

While announcing the measures, the RBI said that tightening of the monetary policy would impact economic growth, which is already under pressure, in the short term.

With the rise in the repo rate, the interest rate for the additional lending facility of the RBI under the marginal standing facility (MSF) has gone up by 25 basis points to 8.5%. This facility was introduced in the annual policy that was unveiled on May 3.

The monetary policy stance, the RBI said, "remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control."

The economic growth rate in the fourth quarter of the last financial year decelerated to 7.8% from 9.4% in the same period a year ago, raising fears of a slowdown. Also, industrial production during April, 2011, moderated to 6.3% from over 13% in the same month last year.

The moderation in growth has not deterred the Reserve Bank into taking a pause on its rate hike strategy, as the "challenge of containing inflation and anchoring inflation expectations persists".

"Thus, while the Reserve Bank needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movement in inflation with recent global developments and their key impact on the domestic growth trajectory," the RBI said.

Pointing out that the inflation is at an uncomfortable level, the RBI said the present wholesale price figures "understate the pressure because (domestic) fuel prices have yet to reflect the global crude oil prices.