Planning to buy your dream house or for your wife her favorite car? Well its time to take the back seat because RBI has increased its key policy rates by 25 basis points. This could affect your loan requirements, when it comes to EMI payments. But its noted that, most banks will be raising the rates after April and if the banks find any improvement in their funds position they might not hike fixed deposit rates.
This has been the 8th increase in these 12 months. The process has been that the repo (rate at which RBI lends to banks against securities), has jumped upto 6.75% and the reverse repo ( rate at which the surplus funds of the banks are placed with the RBI) has jumped to 5% . RBI lends funds to the banks on a daily basis, due to which any increase in the repo rate will lead to an increase in the cost of acquiring funds from the bank, showcasing lending of RBI at higher rates of interest. ” Higher rates will have to be passed on to the customers”, says the country’s largest lender SBI. So even if this 0.25% hike in interest is directed to the borrowers, it would mean an increase Rs.153 in the monthly installments of a Housing Loan worth Rs 10 lakhs for a 15 year period.
Now given the information that due to the continuous inflows in fixed deposit schemes and a sharp improvement in the banks’ liquidity, raise in the deposit rates are highly unlikely. Most banks are likely to wait till the new fiscal period and review the credit demand before raising their rates. But RBI just doesn’t seem to be concerned much. Their main cause of concern is when the “inflation” is set to moderate, which the central bank has yet to make a mention about. The WPI inflation for the month March 2011 is at 7% leaving RBI to increase their inflation forecast from 8% from their previous forecast of 7%. This leaves the GDP growth forecast at 8.5%, unchanged. In the first quarter of the FY 2011-12, banks will be forced to increase their rates of interest in the next two weeks by the RBI in its next monetary policy. Pointing to the analysts’ fear that there might be a positive chance of the rates being increased, inflation concerns are still in the air.
“Historically, interest rates peak in March because this is the month when 40% of tax payments for the year go out of the banking system. It is also the time when credit demand picks up.””We have no plans to increase our rates now. I believe that most lenders will wait until April before taking a decision on their lending rates,” said Keki Mistry, vice chairman and CEO, HDFC. He also added that with crude proces at ease the interest movement would be determined.
“Not only is the rate hiking cycle in 2011-12 now likely to be more extended than initially anticipated but is also likely to be far more front-loaded. We expect inflation to print in at 8.1% in March 2011 and move higher close to 9% by August 2011. We see the RBI hiking its repo and reverse repo by another 25 bps in its annual review in May and this is likely to be followed by 50-75 bps of rate increases through the fiscal year,” concurs Abheek Barua, chief economist, HDFC Bank .