State Bank of India hikes lending rates 0.5%, others waiting to follow

Banks have started hiking lending rates following the Reserve Bank move to raise the cash reserve ratio (CRR) and repo rate by 0.50 per cent each in a bid to rein in inflation. State Bank of India, India’s largest commercial bank, announced a hike in its benchmark prime lending rate by 0.50 per cent to 12.75 per cent with effect from Friday.

Union Bank of India (UBI) has raised its benchmark prime lending rate by 50 basis points to 13.25 per cent. The new rate will be effective from July 1. Other banks have already indicated that they would be raising the rates in the next few days.

According to SBI, the revision will be applicable to all PLR-related lendings and the bank was only restoring its benchmark rates. This means loans (including home, auto and personal) which are linked to PLR would move up. Usually, floating rates on home loans are linked to the benchmark prime lending rate (BPLR). ICICI Bank and HDFC — two leading players in the home loan segment — are expected to take a decision within one or two days.

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Reserve Bank of India drains out money, Financial Markets guards food

There are short term relief, possibility of medium term pain and two big questions in RBI's keenly anticipated monetary policy review which was marked by a 0.25 percentage point hike in the cash reserve ratio (CRR) to 8.25%.

CRR determines the amount of money banks have to keep in deposit with RBI and higher CRR means less funds for banks to lend. RBI is arguing there's too much cash sloshing around in the system fuelling inflationary expectations. Inflation as measured by the wholesale price index has been 7% plus in recent weeks, a three year high.

CRR was increased earlier this month and has climbed from 7.5 to 8.25% in a few weeks. The CRR hikes will take around Rs 27,000 crore out of the banking system, forcing banks to rethink lending strategies but it needn't immediately make them raise rates, including those on home loans. That's the short term relief

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