With the wholesale price index-based inflation rising and there is no end to uncertainties, banks across the spectrum are set to increase lending rates. The increase on loan rates will be up to 50 basis point (half a percentage point) for the short term and one percentage point for the medium tenure.

The banks are, however, not changing their prime lending rates and the hike rates are being down through widening the spread below PLR.

This is the first instance since August 2000, that the lending  rates are being increased. On the liabilities side, Bank of Baroda has already increased its deposits rates by 50 basis points on some slabs.

"We are closely tracking the yield on gilts. The 10-year paper yield which dropped to below 6 per cent has now moved up substantially. We need to respond to that. The deposit rates have already increased. The short-term lending rate could also go up. However, there will not be any change in PLR now," P S Shenoy, chairman of Bank of Baroda, said.

Today, the 10-year gilts yields settled at 6.43 per cent after dropping to 6.66 per cent. Similarly, the five-year corporate paper yield too closed at 7.01 per cent, after touching a low of 7.10 per cent. Dealers dubbed this move as a "correction" which was on the cards.

Shenoy said the rise in rates could be a short-term aberration. "There is no change in the liquidity scenario. The government borrowing programme is also complete. I would maintain the soft interest bias for the longer term," Shenoy said.

The interest rates have moved up by 30 to 90 basis points in the short to the long term owing to uncertainty in the market. The trigger for the rise is also the increase in credit offtake.

"The companies are not waiting for the uncertainty to settle down. Many of them had funded their long-term  funding with short-term resources. These companies were waiting for the appropriate time to enter the market to borrow at the lowest. They have started taking long term loans. There are also enquiries for medium term loans," said HDFC Bank's country head corporate banking Samir Bhatia.

UTI Bank's president (credit) Ashok Kumar said the interest rates have bottomed out for the time being. Because of the uncertainties over the war and sudden pick up in credit, the rates are likely to increase at least in the near term. Also there is no FCNR (B) loans available in the market.

"For the short term, interest rates are likely to go up by around 50 basis points. The rates are charged depending on the relationship with the clients. For new loans in the medium term rates could increase between 50 basis point to one per cent," he pointed out.