RBI sent a warning signal to bankers on excessive lending by raising its repurchase rate by 0.25% to 7.25% on Tuesday.
MUMBAI: The Reserve Bank of India sent a warning signal to bankers on excessive lending by raising its repurchase rate by 0.25% to 7.25% on Tuesday. The repurchase rate - also called the repo - is the rate at which the RBI lends short-term money to cash-strapped banks against government bonds.
Banks that want to borrow money from the RBI will now have to pay more as interest. Logically, it should mean that they will, at some point of time, have to raise lending rates for borrowers as money gets tighter.
Does this mean you will have to pay more for home and car loans in the near future? The good news: most bankers do not expect an immediate rise in retail lending rates. The bad news: some banks may still raise rates if they are short of cash.
“I don’t think the credit policy will have an impact on retail loan rates,” said Bank of Baroda chairman and managing director AK Khandelwal. “It will only improve the discipline of banks in terms of prudence in lending.
Retail loan rates have been hiked twice and a further hike will affect growth.” Khandelwal’s bank has no proposal to raise loans rates as of now.
The main reason for this confidence is that there is enough liquidity in the banking system and banks do not have to borrow from the RBI in the short term.
“I see no immediate change in loan rates as liquidity is slowly getting back to normal after the festive season,” said an official from a large private-sector bank. “Most banks will, in fact, park their money in reverse repos (the instrument through which the RBI sucks out liquidity).”
But there are some discordant voices. “There is a possibility that banks may have to counter the hike by the RBI by increasing deposit rates, which could lead to a hike in loan rates to cover their margins,” said P Mukherjee, head of treasury, UTI Bank.
“The aim of the RBI’s policy is to curb lending to high-risk areas like commercial real estate,” says Shuchita Mehta, chief economist, South Asia, Standard Chartered Bank.
“The impact on retail loans will depend on the positions of individual banks,” said VP Shetty, chairman and managing director, IDBI Bank.
“If a bank has enough resources it would not hike rates, but if it is hard hit for resources then it could hike rates because it would then have to borrow from the market.”
So, borrowers, keep your fingers crossed.
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