The policy rate hike is a signal of rising interest rates, but banks will not rush to hike rates, said Union Bank of India Executive Director S C Kalia. "There would not be an immediate hike, but there is upward bias on interest rates," he said.
The RBI on Tuesday hiked its key short-term lending and borrowing rates by 25 basis points (0.25 per cent) each with immediate effect to tackle high inflation. The short-term lending (repo) rate now stands at 6.5 per cent and the borrowing (reverse repo) rate at 5.5 per cent.
Oriental Bank of Commerce Executive Director S C Sinha, said, "The policy rate hikes will not result in an immediate increase in lending and borrowing rates of banks as this was already factored in by the market, given high inflationary pressures." Sinha, however, added that banks may have to increase the rates in case credit offtake goes up.
Echoing a similar view, Indian Bank Executive Director V Ramagopal said banks had anticipated as much as a 50 basis points hike by the RBI, given the inflation situation. "I don't think market would react immediately, as in the last 3-4 months, there has been several rounds hikes both in deposit and lending rates," Ramagopal said.
However, the possibility of short-term deposit rates going up cannot be ruled out, as the RBI has revised the year-end inflation target upward, Ramagopal added. In its latest policy review, the Reserve Bank warned that inflation is a matter of concern and revised its year-end projection to 7 per cent from 5.5 per cent earlier.
However, it maintained its GDP growth forecast at 8.5 per cent for the current fiscal. Earlier this month, SBI Chairman O P Bhatt had said, "Conventional wisdom says that there should be at least a 25 basis points hike in interest rate (by RBI)."
With respect to the lenders' ability to absorb such an increase, Bhatt said, "The market sentiment is such that a 25-50 basis points (hike), it can absorb."