Mumbai: Personal and corporate loans will become more expensive, with the RBI on Tuesday raising key interest rates sharply for the third time in the last three months, by 0.50 per cent, to arrest price rise.

The central bank, in its quarterly review of the monetary policy, has also revised its fiscal-end inflation projection to 7 per cent from 6 per cent earlier. It has retained the growth project for the current fiscal at 8 per cent.

With a 50 bps hike, the repo rate (at which the RBI lends to banks) would be 8 per cent and the reverse repo rate (at which it borrows from banks) to 7 per cent. However, the cash reserve ratio (CRR), the amount all banks need to park with RBI, remains unchanged at 6 per cent.

All loans, including auto, home, personal and other corporate borrowings, are expected to cost more following the RBI's decision.

Expectedly, industry expressed its disappointment over the sharp increase in interest rates, saying the move would harm the investment sentiment.

"We thought it would be 25 basis points. The RBI has seen something which industry has not... investment sentiments will be muted in the next six months," Ballarpur Industries Limited Chairman Gautam Thapar said.

The stock market also reacted sharply, plunging by over 300 points within minutes of the RBI's policy announcement.

"Notwithstanding signs of moderation, inflationary pressures are clearly very strong... inflation continues to be the dominant macroeconomic concern. On the basis of this assessment, it has been decided to increase policy repo rate by 50 basis points from 7.5 to 8 per cent with immediate effect," RBI Governor D Subbarao said while unveiling the monetary policy.

Inflation, currently hovering above 9 per cent, he said, would continue to guide the policy stance in future. The RBI's next review is scheduled on September 16. The RBI admitted that the cumulative impact of past actions to curb demand and anchor medium-term inflationary expectations will curtail growth in the near term.

Bankers are of the view that the increase in key policy rates by the RBI will definitely have an impact on interest rates, leading to loans becoming more expensive.

"The hike is more than expected and it will push interest rates by up to 50 basis points," said Oriental Bank of Commerce Executive Director S C Sinha.

Within an hour of monetary tightening by the RBI, private sector YES Bank hiked its base rate or minimum lending rate by 50 basis points.

The bank hiked its base rate by 50 basis points to 10.25 per cent with immediate effect, making new loans more expensive by at least 0.5 per cent.

In its annual policy meet on May 3, the apex bank had increased policy rates by 50 basis points, which was followed by a 25 basis points hike at its mid-quarter review in June.

Sounding hawkish, the Governor said, "Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which in turn will be determined by trends in the domestic growth and global commodity prices."

Admitting there has been a moderation in growth, the Governor maintained his previous estimate of 8 per cent GDP growth for the current fiscal and identified the downside risks to growth as global commodity prices, the uncertain global macroeconomic environment and the Centre's inability to meet the fiscal deficit target of 4.6 per cent on the back of a rising fuel subsidy bill.

Home, auto loans to cost more: Bankers

The RBI’s decision to raise key rates for the third time in the current fiscal would make home, auto and corporate loans expensive by up to 50 basis points, burning another hole in the pocket of the consumer already burdened with high inflation.

"The hike is more than expected and it will push interest rates (lending and deposits) up by upto 50 basis points," Oriental Bank of Commerce Executive Director S C Sinha said.

This is the 11th time since March, 2010, that the RBI has raised the interest rate to check inflation, which is currently ruling at over 9 per cent.

RBI's action is in a direction which creates persistent pressure on credit demand. ALCO (Asset Liability Committee) needs to review on the transmission mechanism and timing, said Bank of Baroda Executive Director R K Bakshi.

According to Indian Overseas Bank Executive Director A K Bansal, sooner than later, both lending and deposit rates will go up.

Banks would take a call on interest rates in their respective ALCO in the next few days, Bansal said.

Highlights of Monetary Policy

Following are the highlights of the first quarterly review of Monetary Policy for 2011-12  announced by Reserve Bank of India (RBI) Governor D Subbarao:

Short term lending rate (repo) hiked by 50 bps to 8 pc.
 
Short-term borrowing rate (reverse repo) up by 50 bps to 7 pc.

Cash reserve ratio (CRR) and bank rate left unchanged at 6 pc each.

March-end WPI inflation projection upped to 7 pc, from 6 pc.

To maintain hawkish stance for further monetary action.

Inflation to be the guiding factor, upside risk to food inflation remains.

Economic growth projection retained at 8 pc for FY'12.

Banks' overnight borrowing window under Marginal Standing Facility at 9 pc rate.

Next mid-quarterly monetary policy review on September 16

Second quarterly review of monetary policy on October 25.

JPN/Bureau