Inflation pushes RBI to hike rates, loans not hit, yet

Home loan and car loan rates are not expected to rise although the Reserve Bank of India hiked signal rates by a quarter percentage point on Tuesday. The increase is not strong enough for banks to raise lending rates yet. But, experts said, consumer loans could get costlier later this year. Worried by inflation, RBI announced steps in its annual policy statement for 2010 to move some cash from com- mercial banks to its own chest. It increased the Cash Reserve Ration (the amount of money that a bank has to park with the RBI), the repo rates (rates at which RBI lends to banks) and the reverse repo rate by 0.25 percentage point each. “RBI has set the stage for more rate hikes,“ said Abheek Barua, chief economist at HDFC Bank. He expected RBI to hike policy rates by up to 75 basis points and squeeze more cash out of the system. “If that hap- pens, there may be visible impact on the lending rates.“ “I will not rule out a mid-cycle action because we do not know how the situation will turn out but we will think many times before we do it,“ said RBI gov- ernor Duvvuri Subbarao. The government and the Reserve Bank both expect inflation to moderate signifi- cantly in the coming months, aided by a normal monsoon. That does not mean prices will necessarily come down. It means the worrying uptrend in prices will be arrested. The RBI in its annual mon- etary policy announcement on Tuesday projected the year 2010-11 to end with an inflation rate of 5.5 per cent, down from the worrying 9.9 per cent for March 2010. Reacting to the policy, Finance Minister Pranab Mukherjee, in fact, said it could be as low as 4 per cent. Food price-based inflation that hovered in high double-dig- its last year when the monsoon failed are under control now. Inflation, which actually measure price rises over the previ- ous year with indices, turns soft based on a statistical year-ago base when an uptrend is arrest- ed. “My own belief based on analysis done in my ministry is that inflation is now on a down- ward trajectory and in 2010-11 will be less than 5.5 per cent and, in fact, closer to 4 per cent with an upward bias,“ Mukherjee said. But the RBI took no chances as it squeezed money supply to rein in demand that could fan inflation. “If nothing untoward hap- pens on the weather front, my belief is that overall inflation has peaked and should be on a downward trajectory from now on,“ Mukherjee added. RBI also worried over volatile global oil prices that could load up inflation pres- sures.