With the wholesale price index-based inflation rate touching a 13-year high by shooting past the 11 per cent mark, the Reserve Bank of India is set to soon hike both the cash reserve ratio and the repo rate for banks. This will put pressure on banks to increase their lending rates and the first casualty could well be interest rates on home loans.

“I will not be surprised if it happens in the next three days,” an RBI source told The Indian Express today.

Cash reserve ratio is the percentage of deposits banks have to keep with the RBI and has gone up — over the last 30 months — by almost 300 basis points to 8.25 per cent. Repo is the rate at which banks borrow from the RBI and currently stands at 8 per cent. The source said it could go up by 25-50 basis points. An increase in the repo rate is a signal to banks to hike interest rates.

Reacting to the unexpected spike in the inflation rate to 11.05 per cent for the week-ended June 7, Finance Minister P Chidambaram today hinted at further tightening of the monetary stance by the central bank. “Naturally, we will have to look at stronger measures on demand and monetary sides,” he said, adding the government would try to improve the supply side too.

A Finance Ministry official said an upward revision of economic growth from 8.7 per cent to 9 per cent for 2007-08 — despite a tight monetary stance since the second half of the last fiscal — gave the government and the central bank some comfort that growth would not be seriously impaired this year.

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