Interest rates on Home, other Retail and Car loans are set to firm up in near future as the Reserve Bank of India (RBI) on Friday hiked the rates at which it takes deposits, and lends short-term funds to banks by 25 basis points. RBI took the decision to make tighter money supply for containing the growing inflation, which has touched 9.9% in February.
On Friday, RBI increased the repo rate, the rate at which it lends short-term funds to banks to 5% from 4.75% and reverse repo rate, the rate at which banks park their surplus funds with the central bank to 3.5% from 3.25%.
CMD of a public sector bank said that RBI’s decision to hike the rates is a clear indication to banks to raise their lending rates for containing inflation. However, he refused to give the time line for hiking of the rates, saying that it will be done sooner than later. However, he maintained around quarter a percentage points increase in the lending rates across the board.
On the other hand, according to the latest data released by Reserve Bank of India, there is a clear indication of tightening in the liquidity. As against a surplus liquidity of over Rs 50,000 crore in the banking system till the last week, on Friday it has come down to around Rs 5,000 crore. At the same time, as the credit off-take has picked up during last few weeks, the liquidity condition is likely to tighten further. In that condition, the increase in the repo rate will lead to rise in the benchmark cost of funds.
However, in its statement, RBI said that credit expansion for sustaining the recovery will not be affected as the liquidity in the banking system will remain adequate.
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