Home loan equated monthly installments (EMIs) and interest rates on new loans are set to rise as the rupee slides to record lows virtually every day. The rupee hit a new historic low on Tuesday, breaching the 64 mark against the dollar in early trades.
To defend the rupee, the Reserve Bank has taken measures to bolster short-term rates and squeeze the liquidity in the system. That has pushed India's benchmark 10-year bond yield rose to its highest level since the pre-Lehman crisis.
The benchmark 10-year bond yield rose to 9.48 per cent on Tuesday, indicating that borrowing costs are headed higher.
"Things are not good. Yields are rising so banks are sitting on huge mark to market losses. Incremental leading will be difficult," S.L. Bansal, managing director of Oriental Bank of Commerce, told NDTV.
Many private lenders have already hiked their base rates - the rate to which all loans are linked. The base rate is the rate below which a bank cannot lend, and an increase in the base rate would imply an increase in lending rates for home loans, car loans and personal loans as well.
On Monday, private lender Axis Bank increased its base rate by 25 basis points to 10.25 per cent. HDFC Bank, YES Bank, Kotak Mahindra Bank and Andhra Bank have hiked their rates earlier this month.
Consumers would start feeling the pinch once bigger lenders like State Bank of India and ICICI Bank (the country's largest public and private lender, respectively) announce rate hikes.
ICICI Bank on Friday raised interest rates on fixed deposit by 0.25-0.75 percentage points mainly on short-term deposits, which is been seen as a precursor to rate hikes.
The central bank, in its last policy review, kept the repo rate, or the rate at which it lends to the system, at 7.25 per cent. It kept the cash reserve ratio, the amount of deposits banks park with RBI, unchanged at 4 per cent.
Post the RBI policy, SBI chairman Pratip Chaudhuri had said that bankers will wait for two to three weeks before taking a call on increasing lending rates.
"These steps (RBI's) might be temporary. Unless they linger for very long, none of the banks will increase their loan price. We have reasonably stable source of funds, so we can wait for some time," he added.
However, with no signs of a reversal in RBI policies (announced on July 15) lenders may be forced to hike rates.
"Personally I think it's better for the RBI to hike rates rather than squeeze liquidity," Mr Bansal said.
With no quick fix in sight, banks fear that it's the festival season starting in October that will be hit first. Interest rates on retail loans - home, auto and personal - will go up further hurting industry and growth.
