All loans are set to become costlier as the Reserve Bank on Tuesday increased the key interest rate by 25 basis points to check rising prices, at the risk of sacrificing some growth.
Commenting on the monetary policy announcements, Finance Minister Pranab Mukherjee said, "this decision has been taken by Governor to affirm (RBI's) commitment to tackle inflation as the headline inflation is still high. I do hope as a result of it, (inflation) would moderate in course of time".
He, however, admitted "it would have some impact on growth also. But the situation is difficult and in difficult situation we cannot expect to have a simple situation".
The industry, 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".
Tuesday’s hike is the 13th since March, 2010. The series of rate hikes has cumulatively increased interest rates by 525 basis points.
The policy, according to RBI, is expected "to continue to anchor medium term inflation expectations", while stimulating investment activity to support growth.
Reacting to the announcement, Oriental Bank of Commerce Executive Director S C Sinha said, "Banks are likely to increase both lending and deposit rates following the RBI action. There could be minimum 25 basis points rise in lending rate."
IDBI Bank Executive Director R K Bansal said lending rate would certainly go up on two counts-- one RBI has raised policy rate and second deregulation of saving rate.
These two steps will increase cost of funds for banks, he added.