Equated monthly instalments (EMIs) of all kinds of personal loans and their tenures are set to rise again after the RBI sprang a surprise and attempted to temper price and growth expectations by hiking both cash reserve ratio (the portion of deposits to be kept with the RBI) and repo rate (the rate at which RBI lends funds to banks). While the market and borrowers — who are already hit by double-digit inflation at 11.89 per cent — were undecided whether the central bank would do anything at all, it opted to hike the CRR by 0.25 per cent and the repo rate by 0.50 per cent, taking both rates up to 9%. The CRR is now at an eight-year high and the repo the highest in seven years.

“Every time a medicine is given, people find it bitter, but in the end everybody wants to be healthy,” said Reddy after the announcement.

Back of the envelope calculations show that repayments may increase by over Rs 3.5 lakh over a 20-year period on a Rs 20 lakh home loan, if bankers hike interest rates by up to 1 per cent. Consumers may have to shell out up to Rs 1,500 more every month for a home loan of Rs 20 lakh, if interest rates go up by 0.5-1 per cent.

Bankers have already hinted at a rise in interest rates as they are set to pass on the liability to the borrowers. Expecting a fall in growth and demand in the system, the Sensex plunged 568 points to 13,791.54 as rate sensitive sectors like banks, realty and auto stocks led the bear rout.

Since resuming the tightening cycle in April this year, the RBI has now delivered a 1.50 per cent CRR hike and 1.25 per cent repo rate hike. Banks had recently hiked their lending rates by 0.50-1 per cent following the last round of CRR and repo rate hikes in June.

While hiking the rates again on Tuesday, the RBI pointed to the ongoing buoyancy of aggregate demand in the economy as a source of inflationary concern as well as the strength of monetary and credit growth. Recognising that economic activity will be impacted by its actions, the RBI has moderated its growth estimate from 8-8.5% to around 8%. On the inflation front, it now aims to contain inflation to 7% levels by March 09 as compared to 5% earlier.

The RBI also referred to the budget gap posing “severe challenges” with “implications” for inflation. “This could be warning to the government that any relaxation of the purse strings may be met by additional monetary tightening,” said an analyst.

The government responded favourably to the RBI’s tough measures. “The increase in the CRR and the repo rate is a signal to the banks that credit growth must be moderated, having regard to the need to moderate aggregate demand. If requests for loans are carefully appraised and credit is allocated prudently, it is possible for the banks to ensure that adequate credit is available to the productive sectors,” the Finance Ministry said.

Bankers said Tuesday’s policy hikes will be reflected in the higher bank lending rates in a short span of time, which would eventually lead to slower bank credit and slower growth. “Put together, the latest rounds of monetary tightening can be construed as aggressive. That is perhaps justified, given the strong upside risks to inflation,” said Meera Sanyal, Country Executive - India, ABN AMRO Bank NV.