INDIA BUSINESS WORLD - JUNE 1st - JUNE 30th - 2008
CRR, REPO RATE HIKED BY 0.5%
INDIVIDUAL borrowers, corporates, stock market investors and cash-starved property developers are set to walk a long and painful road, with their worst fears coming true. In a double blow, the Reserve Bank of India (RBI) has hiked the benchmark repo rate and cash reserve ratio (CRR) by 50 basis points each. Repo is the rate at which banks borrow from RBI while CRR is the slice of customer deposits that banks set aside as cash with the central bank. The monetary actions reflects a desperate political leadership and a decisive central bank taking inflation head-on.
Home loan market leader HDFC is expected to hike interest rates, and all banks—government-owned as well as private—will revise their prime lending rates. Thanks to hardening bond yields—a reflection of interest rates in the money market—even sub-PLR loans will go up. “We will take a call on interest rates at the end of the week. Any new rate will be effective July 1. Developers who have been merely accumulating land will face the crunch. However, I don’t expect home loan demand to suffer,” said HDFC managing director Keki Mistry. In the case of home loans, a 50-basis-point hike means an additional EMI of Rs 35 for every Rs 1-lakh loan. Large PSU banks like PNB are also planning to hike rates.
Not just home loans, but two-wheeler, auto and working capital loans for companies will also turn more expensive by 50-100 basis points. In the stock market, banks will be the worst hit followed by realty and auto scrips.
The question that crops up is to what extent higher rates will affect investment demand and pull down GDP growth. According to Ambuja Cements MD AL Kapur, “Corporate margins and expansion plans will be adversely affected. Even raising money will be a huge task. This measure, which is aimed at controlling the headline inflation, will put the economy in a Catch-22 situation.”
While the move was expected and only die-hard optimists in the financial market will be caught on the wrong foot, a twin hike will only deepen the gloom in the stock market. Growth will suffer and markets are likely to remain under pressure,” said BSE broker Ramesh Damani.
The half-a-percentage point CRR hike will see close to Rs 16,000 crore being withdrawn from the market.
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