RBI tightens noose on home loans

Aimed at taming inflation, the Reserve Bank today raised key short-term lending and borrowing rates by 25 basis points, but the move may not lead banks to hike commercial interest rates immediately.

The Central Bank also tightened norms for housing loans to check asset bubble, and possible defaults.

However, banks may not be able to hold on to existing interest rates for long as demand for credit increases and depositors put pressure on them to raise interest rates.
    
To keep enough liquidity in the market, the RBI refrained from raising cash reserve ratio, the amount that banks keep in cash with the central bank, to ensure that economic growth is not strangulated due to paucity of funds.
    
Expressing concern at rising asset prices, the RBI also tightened norms for housing loans, but realty companies said this may not have any negative impact on home demand even if banks raise interest rates.
    
The RBI also asked banks to keep more money aside for teaser home loans as a cushion in case of defaults on such a product. Teaser home loans are given at low interest rates for initial years.
    
"It has been decided to increase the repo rate by 25 basis points from 6 per cent to 6.25 per cent with immediate effect...It has been decided to increase the reverse repo by 25 basis points from 5 per cent to 5.25 per cent," RBI said in its second quarterly review.
    
Repo rate is charged by RBI for giving loans to banks for short-term, while reverse repo is the rate at which the central bank borrows money from banks.
    
The RBI said its moves are expected to "rein in rising inflationary expectations...Be moderate enough not to disrupt growth."
    
Both the Plan panel and the Finance Ministry said that the RBI moves are aimed at striking a balance between controlling inflation and promoting growth.
    
Bankers said they are not going to increase loan rates immediately.
    
"So, whether it (hike by RBI) will raise pressure on the system. Eventually, it will. Whether there would be immediate reaction. Not likely,"   said SBI Chairman O P Bhatt.
    
However, if credit offtake picks up and liquidity tightens further, it would certainly lead to higher interest rates, Indian Bank Executive Director V Ramagopal said.
    
Meanwhile, RBI said that even in the background of uncertain economic revival in advanced economies, the Indian economy is on a growth momentum, despite volatile nature of industrial numbers.
    
It pegged inflation at 5.5 per cent by the fiscal-end, but it should not be confused with reducing the target for rate of price rise from earlier six per cent, since the new projection is based on new series.