It has happened. With inflation a wee bit below double digits, the Reserve Bank of India (RBI) on Friday bit the bullet and raised interest rates after weeks of indecision.
RBI governor Duvvuri Subbarao raised two key signalling rates by 0.25%. While the reverse repo — the rate at which the RBI sucks liquidity out of the banking system — is up to 3.5% from 3.25%, the repo rate is up to 5%. The repo is the rate at which banks borrow from the RBI.
The RBI was expected to raise rates at its next policy meeting on April 20, but the decision to do so a month earlier suggests that high inflation numbers are spooking the central bank.
“Recovery is increasingly taking hold,” the central bank said in a statement on Friday. “The developments on the inflation front, however, are a source of concern.” The bank added: “With rising demand side pressures, there is risk that WPI inflation may cross double-digits in March 2010.”
Will your home loan rates start going up? While no bank has as yet spoken of raising loan or deposit rates immediately, these rates had begun moving north from February. Most banks have withdrawn ultra-cheap fixed-rate home loans of 8% for the first year or two, and many have upped deposit rates by 0.25-0.5% on maturities.
The State Bank, which is yet to withdraw its cheap rate home loan, is expected to do so by April-May.
Other bankers say that overall rates may not rise too soon since there is enough money in the system.
“Currently there is ample liquidity in the market,” said Chanda Kochhar, managing director and CEO, ICICI Bank.
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