Mumbai: Housing, auto and corporate loans may become expensive with the Reserve Bank on Tuesday hiking the key lending rate by 0.25 percent to contain inflation in continuation of its hard-line stance.
There were no surprises in his first full fledged quarterly policy review when Reserve Bank Governor Raghuram Rajan raised short-term lending (repo) rate by 0.25 percent to 7.75 percent and lowered MSF rate by a similar margin to 8.75 percent, extending his stated policy of gradual withdrawal of special measures announced earlier to check falling value of rupee.
Later addressing the media, the Governor said "if our projections (on inflation) and data do not quite match, then we will be induced to take further steps".
For the second time in the current fiscal, RBI scaled down the growth forecast to 5 percent from 5.5 percent for 2013-14. It had originally projected a growth rate 5.7 percent. The growth rate fell to decade's low of 5 percent in 2012-13.
Giving rationale for its policy stance, Rajan said they "are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.
"These will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics," he said.
The Reserve Bank's decision to raise the repo rate for the second time since September will increase the cost of funds for banks and which in turn will make consumer and corporate loans expensive.
Hinting at hardening of lending rates, SBI Chairperson Arundhati Bhattacharya said: "This is something which the ALCO (asset liability committee) will come to a view on. But yes, some rate change is expected...Which way and what, you need to wait till the ALCO meets and takes a view on it."
Most of the banks, however, would continue with concessional lending rate for home, auto and consumer durable loans till January.
In view of the festival season, banks have offered concession in interest rate in housing, vehicle and consumer loans in the range of 0.25 to 1 percent, 0.5 to 3.25 percent and 0.1 to 5.75 percent respectively.
Many state-run banks have also offered a substantial concession in the processing fee till January 31.
The RBI has left other rates unchanged, such as the cash reserve ratio at 4 percent and the mandatory holdings in government securities and other liquid assets as a solvency measure (SLR) at 23 percent.
The Governor, however, doubled the borrowing limit of banks against their cash positions or NDTL (Net demand and time liability) to 0.5 percent for both 7-day and 14-day repos with immediate effect, to increase liquidity in the system.
With these measures, the RBI has calibrated the window between the repo rate (7.75 percent) and MSF (8.75 percent) to 100 basis points, as stated in the September 20 mid-quarter review.
Accordingly, the bank rate is reduced to 8.75 percent with immediate effect. Consequently, the reverse repo rate is adjusted upward to 6.75 percent.
This is the second lending rate hike since Rajan took over on September 4. While he has increased the lending (repo) rate by 0.50 percent, he also brought down the MSF rate, or emergency fund borrowing window for banks, by a steeper 1.5 percent.
The RBI said retail inflation is the biggest threat on the price index front and it will remain elevated at over 9 percent.
Wholesale price index will edge up in the remaining quarters of the year as a result of cascading effect of rupee's depreciation and hikes in fuel and food prices, the central bank added.
"The good monsoon should have a salutary effect on food inflation, but second-round effects from already high food and fuel inflation could impart upside pressures on prices of other commodities and services," it said.
Disagreeing with RBI's projection on the price situation, former RBI Governor and PM's Economic Advisory Council Chairman C Rangarajan said WPI and CPI may not be as high as being projected by the central bank.
"Well, I think the inflation rate may not be as high as (RBI) report seems to suggest. I would really think as far as WPI is concerned, it will be around 5.5 to 6 percent. I don't think it will exceed 6 percent....I expect WPI as well as CPI to remain at slightly lower level than indicated," he said.
Unhappy with the RBI's action, India Inc expressed strong disappointment over the decision to hike short-term lending (repo) rate by 0.25 percent, saying the move is bound to hit investments and hamper growth.
Giving guidance, Rajan said monetary policy faces an unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence.
"It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices," he said.
With the normalisation of exceptional liquidity measures under way, incremental calibration of monetary policy will be shaped by changes in the growth-inflation balance, keeping overall macroeconomic stability in consideration, he said.
To support growth, he said, "complementary action aimed at productivity enhancement, structural reforms and quick project implementation will be needed."
Announcing a slew of consumer-centric measures, the Reserve Bank allowed banks to pay interest on savings deposits and term deposits at intervals shorter than quarterly ones.
"As all commercial banks are now on core banking platforms, it has been decided to give banks the option to pay interest on savings deposits and term deposits at intervals shorter than quarterly intervals," Rajan said in the Second Quarter Review of Monetary Policy 2013-14.
At present, banks pay interest on savings and term deposits at quarterly or longer intervals.
Besides, the central bank directed banks to charge customers for SMS alerts on the basis of usage, instead of imposing a fixed fee, to ensure equity and being reasonable.
"Banks are advised to leverage the technology available with them and telecom service providers to ensure that such (SMS) charges are levied on all customers on actual usage basis," the RBI Governor said.
The RBI also plans to soon launch a 10-year savings instrument that will offer inflation-linked returns to small investors as an alternative to investments in gold.
"It is proposed to launch Inflation Indexed National Saving Securities (IINSSs) for retail investors in November/December 2013 in consultation with the government," it said.
The inflation-indexed securities for retail investors will be linked to the new (combined) consumer price index (CPI). The interest on these securities would comprise a fixed rate plus inflation.
On new bank licences, the policy review said a high-level panel chaired by former RBI Governor Bimal Jalan will hold its first meeting on November 1.
Other members of the high-level advisory committee (HLAC) are former RBI Deputy Governor Usha Thorat, former Securities and Exchange Board of India Chairman C B Bhave, and Nachiket M Mor, Director of the Central Board of Directors of RBI.
There are 26 applicants for new bank licences, including Tata Sons, India's biggest business group, and firms controlled by billionaires Anil Ambani and Kumar Mangalam Birla. Among public sector units, India Post and IFCI have submitted applications.
The RBI had issued guidelines for licensing of new banks in the private sector on February 22 and issued clarifications in the first week of June.
First Published: Tuesday, October 29, 2013, 17:56