EMI nightmare: Home loan set to go up again

Commercial banks are expected to hike interest rates in the coming days to adjust the RBI move that has come four days after inflation hit double digits and touched 11.05 per cent last Friday, most of the rise coming due to higher fuel prices.

Repo rate — the rate at which the RBI lends funds to banks — has gone up from 8 per cent to 8.50 per cent, the highest in six years. CRR — the portion of deposits to be maintained by banks with the RBI — is being increased from 8.25 per cent to 8.75 per cent in two stages, sucking out another Rs 20,000 crore from the banking system.

The RBI steps are aimed at bringing down inflationary expectations by cutting down liquidity and increasing the cost of funds to all — banks and borrowers. The objective clearly is to curb credit and stem money supply that have grown more than the central bank’s indicative projections

Acknowledging — perhaps for the first time — that monetary measures to moderate demand were “somewhat painful”, RBI Governor YV Reddy said that the new reality of high and volatile energy prices was not necessarily a temporary phenomenon any longer. “At this juncture, the overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.”

Bankers have already made up their minds on hiking rates by 50-100 basis points. “The prime lending rate would go up by up to 50 basis points,” said K C Chakrabarty, Chairman, Punjab National Bank. “All loans linked to the PLR like consumer loan, home loan, personal loan are bound to go up,” he said. His bank will decide the quantum of increase in each segment after a meeting of its Asset Liability Committee in the next few days.

State Bank of India, the country’s largest bank, had decided against increasing its PLR of 12.25 per cent after the RBI hiked repo rate by 25 basis points to 8 per cent on June 11. While SBI was not available for comment, it may be forced to raise its PLR now that the RBI has gone for a double barrel attack to rein in inflation.

“There will be pressure on my margins. We will have to revise our prime lending rates. Our board will be meeting later this week to decide on the same. Going forward, we do not see further measures by the RBI,” said T Narayansami, Chairman and Managing Director, Bank of India.

Home loan rates are bound to move up and the end consumer will have to pay higher EMIs (equated monthly instalments). “High inflation will negate the better returns consumers will expect from fixed deposits. To produce good returns in real terms in this high price scenario, banks will have to give 12-13 per cent returns on fixed deposits,” said Anil Kumar, chief executive officer, Birla Sun Life Mutual FUnd.

It will also be dampener on the real estate sector which is facing a price correction in several parts of the country. Demand for vehicles is expected to come down as the interest rise will come as another blow soon after the rise in fuel prices.

The way banking stocks have been trading, it was quite expected, analysts said. With banks set to increase their PLRs, the cost of funds for the industry will also go up. The increase in rates will definitely have a negative impact on growth. Industry will have to bear the brunt as credit will become more expensive.

But banks have their own reasons to act. “Liquidity will be choked as more money from the bank will be mopped up by the RBI due to the CRR hike, that too, without any interest. Our borrowing cost will go up. Hence we will take a call on our lending and deposit rates. We will also have to check our margins before deciding the rates. Our ALCO meeting is scheduled on Monday to review the rates,” said Allan CA Pereira, CMD, Bank of Maharashtra. “We will take a call on our lending and deposit rates. I do not expect any further measures to be taken by the RBI to contain inflation in the near future,” said BOB CMD MD Mallya.