Reserve Bank hikes repo rate by 25 bps, CRR by 50 bps to 6.5% to fight off inflation

Reserve Bank hikes repo rate by 25 bps, CRR by 50 bps to 6.5% to fight off inflation; Loan EMIs all set to rise further

- Thanks to Power Your Trade.com

It aint no April fool joke this. Your home, car and personal loans EMI are all set to rise with the surprising move by RBI to raise rates. In yet another measure to curb inflation, the Reserve Bank of India has hiked the cash reserve ratio, or CRR as well as the repo rates. The hike in repo rate by 25 bps to 7.75% will be effective immediately.

The banking regulator will hike CRR by 50 bps to 6.5% in two phases. The CRR will be raised to 6.25% from April 14, and from April 28, it will be raised to 6.5%. The State Bank of India will review the situation to hike rates and termed RBI's move as "taking out liquidity to curb inflation." It believes that the profitability of the banks will be impacted.

Some economists, however, are critical of these moves to tighten money supply. They argue that the current high inflation is mainly because of rise in prices of primary articles like foodgrains and commodities, which can be controlled only through supply side management. The increase in the interest rates, they say, will hurt economic growth.

The apex bank hopes to drain the banks of Rs 15,500 crore via the CRR hike. The RBI has also cut interest rates on CRR balances to 0.5% vs 1%, which will be effective from April 14. The RBI calls the repo, CRR hikes in anticipation of liquidity conditions. The rationale behind the repo, CRR hike according to the RBI is to "contain inflationary expectations." The Finance Minister has indicated that the Central Government was supportive of the policy measures taken by the RBI and that the bank had consulted it before hiking the repo and CRR rates.

This is the third in the series of monetary squeeze in four months. Incidentally, the other two hikes were announced outside the monetary policy review on December 8 and February 13. Despite these, year-on-year credit growth was 29% on March 15.

Interest rates on loans are set to shoot up further with the RBI deciding to make money costlier. Though these measures are likely to hit economic growth, in a significant policy-turnaround statement, RBI said growth had now become a secondary concern. Controlling inflation is the central bank’s top priority. This would leave banks with no choice but to increase home loan rates by half a percentage point to 11.50%. The measure, besides affecting prospective loan seekers, will also hit those already paying home loan EMIs at floating rates. Interest rates on personal and commercial loans are also set to increase by the same amount.

In the last two years or so, banks have increased home loan rates from 6.5% to 11%, resulting in equated monthly instalments rising by almost 43%.

Reacting to the hike by RBI, HDFC Bank's Ashish Vaidya predicts a sell-off in the bond markets on Monday. Meanwhile SBI said that it will review rates after the RBI announces its decision. Arun Shandilya, DMD & CFO of SBI said that the bank will have to review rates because of the RBI decision. He further predicted the RBI move to hit profitability of banks. The largest public sector bank, SBI, also sees the current rate hike likely to impact credit growth. The pace of growth is also likely to suffer due to the capex planned by the industry. An ICICI Bank head sees upwards pressure on interest rates as a result of the RBI move; however, he added that it was too early to comment on the size and the time of the PLR hike.

K Raghuraman, Executive Director, Punjab National Bank feels, "We don't see any PLR hike in the near future, " but added that may do a review in the first week of April, the bank may take an overall look at the situation and take a call. But Yes Bank has gone ahead and raised its PLR by 75 bps to 14.75%.

As for the equity markets, analysts expect a gap down opening of atleast 150-200 points on Monday. Interest rate sensitive sectors like auto, real estate and especially banking are expected to react negatively to this move and may face tremendous selling pressure

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