Interest rates on home, auto loans to rise

Mumbai: Interest rates on housing, automobile and corporate loans are set to rise with India's central bank hiking key rates in its monetary policy for this year unveiled on Tuesday to suck excess liquidity out of the system to tame inflation.

The Reserve Bank of India (RBI) also projected India's growth for this fiscal at upward of 8 percent, against 7.2 percent as per the earlier projection, while the annual rate of inflation at the end of March 2011 is projected at 5.5 percent.

RBI Governor D. Subbarao hiked the repurchase (repo) rate and the reverse repo rate by 25 basis points each. At the same time, he also increased the cash reserve ratio to 6 percent from 5.75 percent earlier.

The repo rate, which was 5 percent prior to Tuesday's revision, is the interest charged by the central bank on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for commercial banks.

The reverse repo, which stood at 3.5 percent, is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park its funds with the RBI.

The new rates were unveiled by Subbarao before chief executives of commercial banks. The new repo and reverse repo rates are effective immediately, while cash reserve ration is to take effect from the week beginning April 24.

The following are the revised policy rates and reserve ratios of the central bank:

Bank rate: 6 percent

Repurchase (repo) rate: 5.25

Reverse repurchase rate: 3.75

Cash reserve ratio: 6 percent

Statutory liquidity ratio: 25 percent

According to banking industry sources, the hike in cash reserve ratio is expected to suck Rs.25,000 crore ($2.75 billion) out of the system. The hikes in the policy rates will also impact on the amount of funds available for commercial credit.

"The economy is recovering rapidly from the growth slowdown but inflationary pressures, which were triggered by supply side factors, are now developing into a wider inflationary process," Subbarao said.

"As the domestic balance of risks shifts from growth slowdown to inflation, our policy stance must recognise and respond to this transition."