Loans to cost more as RBI hikes repo rate

Apex bank has continued its hard-line stance by increasing key lending rate by 0.25% to 7.75%

Mumbai (PTI): Housing, auto and corporate loans may become expensive with the Reserve Bank on Tuesday hiking the key lending rate by 0.25 per cent to contain inflation in continuation of its hard-line stance.

There were no surprises in his first full fledged quarterly policy review when Reserve Bank Governor Raghuram Rajan raised short-term lending rate by 0.25 per cent to 7.75 per cent and lowered MSF rate by a similar margin to 8.75 per cent, extending his stated policy of gradual withdrawal of special measures announced earlier to check falling value of rupee.

Later addressing the media, the Governor said "if our projections on inflation and data do not quite match, then we will be induced to take further steps".

For the second time in the current fiscal, RBI scaled down the growth forecast to 5 per cent from 5.5 per cent for 2013-14. It had originally projected a growth rate 5.7 per cent. The growth rate fell to decade's low of 5 per cent in 2012-13.

Giving rationale for its policy stance, Rajan said they "are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth. "These will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics," he said.

The Reserve Bank's decision to raise the repo rate for the second time since September will increase the cost of funds for banks and which in turn will make consumer and corporate loans expensive.

Hinting at hardening of lending rates, SBI Chairperson Arundhati Bhattacharya said: "This is something which the ALCO (asset liability committee) will come to a view on. But yes, some rate change is expected. Which way and what, you need to wait till the ALCO meets and takes a view on it." Meanwhile, the apex bank will soon launch a 10-year savings instrument that will offer inflation-linked returns to small investors as an alternative to investing in gold.

"It is proposed to launch Inflation Indexed National Saving Securities (IINSSs) for retail investors in November/December 2013 in consultation with the government," the RBI said in its Second Quarter Review of Monetary Policy 2013-14.

The inflation-indexed securities for retail investors will be linked to the new consumer price index (CPI). The interest on these securities would comprise of a fixed rate plus inflation. "Interest would be compounded half-yearly and paid cumulatively at redemption. These securities will be distributed through banks to reach out to the masses," the RBI said.

Eligible investors would consist of individuals, Hindu undivided families, trusts and charitable institutions. The Union Budget for 2013-14 had proposed introducing instruments that would protect savings from inflation and provide an alternative to gold as an investment avenue for individuals.