Mumbai: In a path-breaking decision, the RBI on 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 Rs 1 lakh, while below that amount it should be a uniform rate.

Read More: RBI frees savings bank interest rate

RBI rate hike will impact growth: FM

Against the backdrop of criticism of its hawkish stance, the central bank on Tuesday raised the key interest rate by 25 basis points from 8.25 percent to 8.50 percent, 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 percent and reverse repo (rate at which banks park their funds with the RBI) would be 7.5 percent.

"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 percent from 8 percent 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. "I do hope that decision of RBI to enhance the repo rate and reverse-repo rate by 25 basis points would have its impact on inflation. Of course, it would have some impact on growth also," Mukherjee said.

In a statement he said RBI's policy "would help in getting us back to a more comfortable inflation situation soon while leaving scope for growth to pick up in the second half of current fiscal year".

The RBI said inflation, at present ruling near the double-digit mark, will start cooling by December this year and is likely to come down to 7 percent by March, 2012.

RBI has kept bank rate and cash reserve ratio (CRR) unchanged at 6 percent each, while retaining the statutory liquidity ratio at 24 percent.

With regard to freeing the savings bank deposit rates, RBI has demolished the last bastion of the regulated interest rate regime. As part of the economic reforms programme, RBI had earlier given freedom to banks to determine fixed deposit rates, depending on their asset-liability positions.

"There should not be any discrimination from customer to customer on interest rates for similar amount of deposit," RBI said further.

About 20-25 percent of the total bank deposits are parked in savings bank accounts.

Commenting on the hike in RBI's policy rate, leading bankers have indicated that they would increase the lending rate by 25 basis points to pass on the cost.

"Banks are likely to increase both lending and deposit rates following the RBI action. There could be a minimum 25- basis point rise in lending rate," Oriental Bank of Commerce Executive Director S C Sinha said.

Banks have not raised interest rates following the September review of credit policy, Sinha said. Within hours of the RBI announcement, private sector lender YES Bank hiked its deposit rates by a hefty 2 percent to 6 percent with immediate effect.
Besides, it also increased its lending rates by 25 basis points to 10.5 percent.

However, some bankers said they were not in a hurry to hike rates as the liquidity position is comfortable.

"We are not in a hurry. We will see how it (the rate hike) pans out. We don't see any pressure now (on liquidity). Banks are comfortable with the liquidity now. Banks will not be desperate to raise rates," SBI Chairman Pratip Chaudhuri said.

India Inc, which has been seeking a pause in interest rate rike, also expressed concerns saying the rate hike would weaken economic growth.

"Another interest rate hike by the RBI will further weaken economic growth and impact all other indicators," Assocham President Dilip Modi said.

The industry, however, can heave a sigh of relief as RBI hinted that the likelihood of a hike in December is "relatively low".