The past week saw an all-out effort from the Union government and the Reserve Bank of India to rein in runaway prices, which pushed annual inflation rate to 6.73 percent for the week ended February 3.

The government and the apex bank took a series of measures to curb inflation and squeeze liquidity in the banking system, which has resulted in overheating in certain sectors of the economy.

The Reserve Bank of India on Tuesday announced a 50 basis points increase in the cash reserve ratio (CRR) the slice of customer deposits that banks set aside as cash from 5.5 percent to 6 percent.

The measure, to come in two doses 5.75 percent from February 17 and then 6 percent from March 3 will impound Rs 14,000 crore from banks, which will now be left with less resources to lend from.

RBI has justified the move in view of the paramount need to contain inflation expectations and in the light of the current liquidity conditions.

Also, buying a home or a car or seeking a personal loan for an overseas trip in the coming summer may now pinch you a lot more than what you had expected. Now most bankers feel that it is imperative that lending rates will shoot up further, by another 25-50 bps at least.

Home loan rates will go up as banks will now charge us higher rates. But we feel that housing prices are high because of supply side constraints. An increase in rates would not deter genuine home buyers, but investors would keep away, said Deepak Parekh, chairman, HDFC.

ICICI Bank, which recently announced a 100 bps hike in its prime lending rate and home loan rates, is expecting a slowdown in consumer credit on account of the rapidity at which the rate hikes have been announced. Consumer credit will significantly slow down because of the pace at which rates have been increased, said Kalpana Morparia, joint managing director, ICICI Bank. She, however, added that borrowing from genuine home buyers as against investors is likely to continue. A 100 bps increase in lending rates raises the equated monthly instalment on a 20-year Rs 10 lakh loan by Rs 700.
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