Loans to cost more,depositors will gain
Interest rates on auto loans and home loans may increase over the next couple of months. That’s the bad news coming out of the Reserve Bank of India, which hiked its policy rates for the fifth time this year on Thursday.
The good news, however, is that the interest you get on deposits will also increase. Banks will need to pay higher rates to attract depositors who have options such as the employees’ provident fund which will now pay 9.5 per cent interest.
On Thursday, the Reserve Bank hiked the repo rate (that at which banks borrow from it) from 5.75 per cent to six per cent, and also raised the reverse repo rate (that at which banks can park funds with it) by 0.5 per cent to five per cent. Commenting on the RBI’s action, Union finance minister Pranab Mukherjee termed it a “step in the right direction” as the economy is still facing inflationary pressures. Inflation, the rate at which prices increase, has been uncomfortably high in India for the past several months.
Higher rates are supposed to make credit scarce and therefore reduce consumption by consumers and investment by companies — which should result in lower demand for goods and lower prices. However, this has not happened so far.
This is the fifth rate hike by India’s central bank this year, but the banks have so far avoided raising either deposit or lending rates. The freeze has been because of poor credit offtake, says Mr M.D. Mallya, chairman-cum managing director of Bank of Baroda. Credit demand is expected to improve in the second half of the year because of the approaching festival season, he said. This, Mr Mallya added, will allow the banks to hike their rates.
Some increases in rates have already started. Almost all the banks had revised upwards both deposit and lending rates in August. As of now, one-year fixed deposits are fetching rates of 6.5 to seven per cent annually. Home loan rates are currently ranging between nine to 10 per cent for the top lenders. These are likely to increase over the coming months.
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