All loans are set to become costlier, with the Reserve Bank today hiking the key interest rate for the 12th time since March, 2010, by 25 basis points to rein in high inflation.
With today's decision, the short-term lending (or repo) rate at which banks borrow from the RBI stands increased to 8.25% and the short-term borrowing (reverse repo) rate at which banks park their funds with the RBI to 7.25%.
Headline inflation rose to 9.8% in the month of August from 9.2% in July this year.
Despite the RBI hiking rates several times since March, headline and food inflation are close to double digits.
"As such, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," the RBI said in its mid-quarter review of the monetary policy.
Going forward, the RBI's stance will be influenced by signs of downward movement in the inflation trajectory, to which a moderation in demand is expected to contribute, besides the implications of global developments, it said.
"The step is consistent with the RBI monetary stance for the first half of 2011-12 and overall concerns on growth sustainability in the medium term.
"I am hopeful that measures taken would get us back a more comfortable inflation situation earlier rather than later, while having scope for growth to pick up in the second half of the year," Finance Minister Pranab Mukherjee said.
Commenting on the rate hike, Indian Overseas Bank Chairman and Managing Director M Narendra said banks need to pass on the hike to customers as the cost of funds has gone up.
"I believe banks would wait till the month-end before taking a call on an interest rate hike," he said.
"The rate hike is on expected lines and would result in interest rates, both deposit and lending, going up," Oriental Bank of Commerce Executive Director S C Sinha said.
Echoing similar views, Corporation Bank Chairman and Managing Director Ramnath Pradeep said, "Banks will have to raise rates, but when and how will be decided by individual banks, depending on their asset liability conditions."
According to Punjab and Sind Bank Executive Director P K Anand, the impact of the policy rate hike will take effect with a time lag.
The banks, he said, will maintain the current rates at least for the next 15 days and take a call on revising them after ascertaining credit demand.
Earlier this week, State Bank of India Chairman Pratip Chaudhuri had said if the RBI raised interest rates, banks would have to pass on the increase to customers.
"It has to be financial transmission," Chaudhuri had said.
Source: Business Standard
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