Loans to get dearer; savings bank deposit rates deregulated

In a path-breaking decision, the RBI Tuesday deregulated savings deposit rates but continued its hawkish stance on interest rate that will make EMIs on home, auto and other loans costlier.

The banks are now now free to fix their saving bank rates on deposits above Rs1 lakh, while below that amount it should be a uniform rate.

Against the backdrop of criticism of its hawkish stance, the central bank today raised the key interest rate by 25 basis points from 8.25 per cent to 8.50 per cent, the 13 hike in 20 months.

With this hike in interest rate, the repo (rate at which RBI lends money to banks) stands at 8.5 per cent and reverse repo (rate at which banks park their funds with the RBI) would be 7.5 per cent.

"Changing the policy stance when inflation is still far above the tolerance level entails risks to the credibility of the RBI's commitment to low and stable inflation," RBI said while lowering growth projection to 7.6 per cent from 8 per cent estimated earlier for the current fiscal.

The central bank, however, indicated that it may not increase the rate in its next review in December.

Endorsing the rate hike, Finance Minister Pranab Mukherjee said that the decision will help in containing inflation but will have some implications on growth.

Bankers indicated that they may pass on the increase to customers as funds become costlier on account of hike in short-term borrowing rate and also due to deregulation of savings bank deposit rates, as the competition will intensify.