Loans are set to get costlier, following the 25 basis points hike in the repo rate by the Reserve Bank of India. While the hike was on expected lines, it is the central bank's incessant warning about the dangers of inflation that is more pertinent, said bankers.
The increase in rates could impact credit demand and slow down investment, bankers added.
According to
Mr M. Narendra , CMD, Indian Overseas Bank, also agreed that sectors that are not considered as productive may see interest rates on loans going up, like auto loans or loans to non banking finance companies, barring micro finance institutions.
“I expect a 25 basis points hike in lending rates and a hike in deposit rates at the shorter end,” Mr Narendra said.
According to Mr Mallya, an immediate hike in lending rates is unlikely as the liquidity pressure has eased slightly and demand is sluggish.
Mr M.V. Nair , CMD, Union Bank of India, said as banks had significantly upped the deposits rates in the last couple of months, there is no pressing need for an immediate upward revision in deposit rates. However, on the lending side, banks will mark up their key lending benchmarks – Base Rate and Benchmark Prime Lending Rate.
Even if banks don't increase their benchmark lending rates, they can still raise the risk weighted pricing for corporates, depending on the individual borrower, thereby ensuring the transmission of the RBI hike, Mr Narendra said.
IDBI Bank would hike lending rates at this point of time, as it had hiked rates by only 150 basis points, which was at the lower end of the range last year, said Mr Melwyn Rego , Executive Director, IDBI Bank.
“There will definitely be an immediate effect on loan rates. Small and medium enterprises will be more affected than the larger industries. In times like this these enterprises should be closely monitored. There will be short term impact on the auto sector,” he added.
As large corporates have reported a lower interest expense ratio in the current rising interest rate cycle, they will be in a position to absorb the rise in lending rates and pass on the same by marking up the prices of their products and services, Mr Nair pointed out.
Most bankers feel that the central bank is still very concerned with the high inflation and will persist with its policy to hike rates.
The whole idea is to ensure that because of the high interest rate scenario there will be curtailment of money supply, said Mr Mallya.
The take away is to stay prepared for more rate hikes as there are not enough strategies to anchor inflationary pressures, given that price hike in petroleum products is in the offing and uncertainties on the import effect on inflation, said Mr Moses Harding , Executive Vice- President, IndusInd Bank.