Home, auto loans will become expensive, say banks

Banks see a further hardening of retail lending rates following the 25 bps hike in RBI's repo rate. Interest rates on auto, home and other loans are expected to go up as banks try to pass on the additional cost to customers.

While the RBI move is on expected lines, ICICI Bank managing director Chanda Kochhar said the rate hike is expected to be passed on to he customers.

Bankers, however, do not expect inflationary expectations to moderate as it continues to remains stubborn despite several bouts of interest rate hikes by the RBI as well as banks.

With credit growth still robust, banks will try to pass on the burden to customers, Union Bank of India chairman MV Nair was quoted as saying. He, however, refused to specify how soon the base rate hike would be effected.

Besides the hike in the repo rate, RBI has also raised the interest rate under the Marginal Standing Facility, an overnight borrowing window, to 8.5 per cent from the earlier level of 8.25 per cent.

The rate hike will put pressure on the short-term deposit rates and subsequently on the lending rate, according to N Narendra, chairman of Indian Overseas Bank.

Banks may not immediately increase lending rates and wait for a pick-up in credit offtake before thinking of passing on the burden to customers.

While banks generally expect the rate hike to dampen credit flows, they agree that it is an inevitable necessity in fighting inflation, which will do more damage to the economy than the rate hike.