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Home, other loan rates to go up as RBI talks tough on inflation

RBI has hiked the repo rate, through which it injects liquidity in the banking system, to 7.50 per cent from 7.25 per cent.

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MUMBAI: Buying a house, car, shares or shopping through credit cards may become expensive with the Reserve Bank of India hiking a key short term rate by 25 basis points for taming inflation.

In a policy review that may trigger across-the-board increase in interest rates, the RBI on Wednesday hiked the repo rate, through which it injects liquidity in the banking system, to 7.50 per cent from 7.25 per cent.

Concerned over excessive credit growth, the central bank targeted real estate, personal loans, credit card advances and exposure in share markets through higher provisioning norms.

While the home finance was kept out of these 'heated areas' which would attract even higher interest rates, analysts feel that buying a house would still become expensive along with the overall hardening of interest rates.

In his statement on the third quarterly review of monetary policy, RBI Governor Y V Reddy said the objective was to keep the inflation rate between 5 and 5.5 per cent this fiscal. In the backdrop of the buoyant economy, the RBI revised the GDP growth projections to 8.5-9 per cent for 2006-07.

The apex bank kept all other key rates unchanged. The bank rate and the reverse repo rate (the liquidity sucking mechanism) were kept at six per cent each, while the cash reserve ratio was maintained at 5.5 per cent. The last tranche of the CRR hike was effected in December and January to curb money supply and inflation.

It kept the statutory liquidity ratio unchanged at 25 per cent, despite a recent Ordinance allowing RBI to reduce it.

"We are trying to rebalance by attacking inflation without affecting the growth momentum," Reddy said.

Asserting that the monetary policy stance would help contain inflation, Finance Minister P Chidambaram said, "It is along expected lines".

"RBI Governor has increased repo rate and risk weightages for four sectors excluding the housing sector. That will bring comfort to the home buyers," he said.

On rising interest rates, he said, "Interest rate is a small part of the cost to the industry. I hope the industry and business will continue to go along with their investment plans".

Bankers said overall, the policy addresses concerns of inflation. However, there could be a tightening of liquidity leading to rate hikes for certain categories of loans.

"A message has been sent that the RBI intends to tackle inflation decisively," ICICI Bank Executive Director V Vaidyanathan said.

Liquidity could come under pressure, but enough would be available for deployment into productive sectors such as agriculture, SME segment, industry and infrastructure, they said.

The policy stressed on a determined and coordinated effort by all to contain inflation without unduly impacting the growth momentum since it was "not only an economic necessity but also a moral compulsion".

"The emphasis is pro-growth," Reddy said.

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