ICICI Bank, HDFC hike rates to absorb RBI shock

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ICICI Bank, HDFC hike rates to absorb RBI shock

The Reserve Bank Of India shocked the economy on Friday with a mini credit policy that went full throttle to tame inflation and credit growth.

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The Reserve Bank Of India shocked the economy on Friday with a mini credit policy that went full throttle to tame inflation and credit growth.

Money is all set to become more expensive - thanks to the RBI increasing its key policy rates. The Cash Reserve Ratio, was hiked by 0.5% to 6.5%, while the repo rate, which is the rate at which banks borrow from the RBI, was increased by 0.25% to 7.75%. RBI says the trigger is the steaming 6.5% growth in infaltion and the near 30% growth in loans. For once, even the Finance Minister supported RBI's moves.

"The government is fully supportive of these measures," says Chidambaram. Even if the FM backs the RBI, bankers say continuous CRR and Repo rate hikes will have a grave impact on financial markets and inflation is tamed by the year-end.

"Hopefully, core inflation will come down by the year-end - that's our expectation. But this move of the RBI is pretty material and significant as continuous rate hikes will have a stiffening impact on financial markets," mentions Uday Kotak, Vice Chairman, Kotak Mahindra Bank .

ICICI head honcho K V Kamath, feels there is definitely an upward pressure on interest rates. He reiterated his view that there will be no impact on the existing investment pipeline. "We don't see investment demand really being affected right now, yes consumer credit has being slowing and may be it will slow down further."

Bankers say credit offtake will not be as high as 30% and will cool off. But will higher rates begin hurting company bottomlines?

According to Nimesh Kampani, Chairman, JM Financials, "If this is temporary, then it will have no impact but if this is going to be permanent, then it will hurt profit margins."

The first to respond to the Reserve Bank's CRR and repo rate hike was the country's largest lender of consumer loans, ICICI Bank. It has increased its consumer loan rates by 1% to 12.75%. It has also hiked its benchmark prime lending rate by 1% to 15.75%.

Some bankers feel that since April to June are slow months for credit demand, there may not be a need to pass on higher borrowing costs to customers immediately. But most banks say they are likely to review their lending rates in the coming weeks, and rates hikes may just be around the corner.

The first to respond to the Reserve Bank's CRR and repo rate hike was the country's largest lender of consumer loans, ICICI Bank. It has increased its consumer loan rates by 1% to 12.75%. It has also hiked its benchmark prime lending rate by 1% to 15.75%.

Commenting on the the impact of the hike on consumer loans, Joint Managing Director of ICICI Bank, Kalpana Morparia said, "Home loans, as we have been maintaining for the past few months, the twin impact of higher real estate prices and the rising interest rate scenario has cooled down demand on the home loan. We will still see a growth number but significantly lower than the 30% number that we have seen in the past few years."

In response to the Reserve Bank's CRR and repo rate hike, HDFC has also hiked lending rates by 75 bps.

Commenting on the RBI's move, Chairman of Bank of Baroda , Anil Khandelwal mentions that the pressure on interest rates is eminent and he is not in favour of a knee-jerk reaction. He also adds that the current interest rates need to be reviewed.

"The situation we are catapulted into is that definitely there is pressure on interest rates but we are against any knee jerk reaction. Each bank has to go through its asset liability but one thing is definite, that the current interest rates needs review," says Khandelwal.

- Surya Surendran (With CNBC-TV18 inputs)