Your EMIs will rise again

Your equated monthly instalment (EMI) amount could go up in the new financial year.

The Reserve Bank of India (RBI) is expected to announce one more hike in key policy rates in the next mid-quarter monetary policy review to be held on March 17, forcing banks to hike their lending and deposit rates.

Almost all the economists DNA Money spoke to expect a hike of 25 basis points (a basis point is one-hundredth of a percentage point) each in the repo and reverse repo rates.

“We will see more hikes in lending rates in the near term, due to which EMIs will go up. But the depositor will be benefited as deposit rates will also go up,” said Harsh Roongta, chief executive officer, Apnapaisa.com.

Economists feel the hike in repo and reverse repo rates is necessary as inflation is still well above the central bank’s comfort level —- January inflation came in at 8.23%, down just 20 basis points from December’s 8.43%.

“We expect the RBI to hike policy rates by 25 bps on March 17 with January inflation surprising up,” said Indranil Sen Gupta, economist, Bank of America Merrill Lynch in a report released on February 14.

According to P Sitaram, chief financial officer, IDBI Bank, “If the rate hike happens and deposit rates are also increased, then definitely the lending rates will also increase. The decision to increase deposit rates will depend upon the extent of rate hike by the RBI.”

Banks will increase lending rates in a bid to protect their net interest margins, which is the difference between interest earned and interest paid as a percentage of the bank’s assets in a given period.

“Interest rates in the economy will go up and due to that banks will hike lending rates. Banks have to protect their margins so they will have to hike lending rates. Banks will hike lending rates judiciously in baby steps,” said Suresh Ganapathy, head of financial research team, Macquarie Securities. Ganapathy feels another 50 basis points hike in lending rate is in store, but it will be done in baby steps.

Due to the series of rate hikes announced by the RBI during FY11, credit has become costly and the high lending rates are hurting the borrowers.