EMIs on home and auto loans likely to go up

New Delhi: The Reserve Bank of India (RBI) is set to signal higher interest rates in the credit policy on Thursday. But your equated monthly installments (EMIs) are not likely to go up till Diwali.

The RBI is all set to announce its first-ever mid-quarter review of its policy rates, which effectively means that banks are likely to pass on the burden to consumers.

A Network 18 poll shows 60% of bankers and economists expect a 25 BPS hike in repo, while 40% don't see a repo hike. Repo rate is the rate at which banks borrow from the RBI.

A bigger majority of 90% believes the reverse repo will be surely hiked. If policy rates are hiked this time, home and auto loan borrowers under flexible rate schemes may see a rise in their monthly outgo towards loan interest.

If the central bank hardens the rate it will be the fifth time this year.

So will banks hike your EMIs? Latha Venkatesh, Banking Editor of CNBC-TV18 explains: "The banks are unlikely to hike rates immediately as loan demands are currently low. Banks will most likely wait for a better credit demand before hiking. Rate hikes are likely from October as the credit demand picks up from then. Deposit rates, on the other hand, are unlikely to go up. The banks are likely to wait before hiking the rates."

The RBI is likely to raise the policy rates by up to 25 basis points to tame inflation, which is still ruling near the double-digit mark, said experts.

Inflation, as per the revised index was 8.51 per cent in August, although it was 9.5 per cent according to the old index.

Even Finance Minister Pranab Mukherjee, while responding to decline in inflation, which under the new series fell by 1.3 percentage points during August, had said: "There is no room for complacency. We must continue to be vigilant and be prepared with the instruments of fiscal and monetary policy to use them as and when the need arises."

Citigroup said in its research report: "Given trends in both macro and sectoral data, coupled with the RBI saying that policy rates are still far from a normal position, we expect the RBI to raise both repo and reverse repo rates by 25 BPS in its review on September 16."

The government, on Wednesday, came out with a new wholesale price index series that measured inflation in August at 8.5 per cent based on 2004-05 prices.

Although the August figure is lower than that of July, which was at 9.8 per cent, experts believe the supply and demand side pressures still remain and RBI should hike its short-term lending (repo) and borrowing (reverse repo) rate to control money flow.

RBI Deputy Governor Subir Gokarn also expressed concern, saying: "The inflation rates that the economy is now experiencing, both from the supply and the demand sides, are clearly a matter of great concern. It is incumbent on the government and the central bank to use all the means at their disposal to rein inflation."

"The RBI will go in for a rate hike as robust growth in industrial output and healthy economic growth would give the RBI enough cushion to make money expensive," Deloitte Principal Economist Shanto Ghosh said.

The RBI has raised interest rates four times this year, upping key policy rates by 100 basis points as it tries to combat high inflation in Asia's third-largest economy.

In its first quarter monetary review in July, the central bank had raised short-term lending and borrowing rates by 0.25 per cent and 0.50 per cent, respectively.

Following the increase, the repo rate stands at 5.75 per cent and the reverse repo rate at 4.50 per cent. India's GDP grew by 8.8 per cent in the first quarter, against 6 per cent in the April-June period last fiscal.

Furthermore, industrial output expanded by 13.8 per cent in July from 7.2 per cent in the corresponding month last year.

With PTI inputs

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