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SBI hikes lending rate by 25 basis points; stock up
April, 20th 2011

The State Bank of India has made loans dearer by raising base rate by 25 basis points, ahead of RBI's annual monetary policy review on May 3, when the central bank may raise policy rates to rein in inflation that's well ahead of its forecast.

At 10:10 am, shares of SBI were trading 1.37% up at Rs 2776.05 on the Bombay Stock Exchange .

Other banks may follow the leader and keep raising rates for most part of the year as the central bank is likely to raise policy rates to curb demand that's far exceeding the ability of manufacturers to ramp up supply. Standard Chartered has doubled its policy rate increase forecast to 100 basis points this year.

A basis point is 0.01 percentage point. SBI's existing home loan borrowers, who are under the dual rate - or teaser rate scheme, are insulated from the rate hike as they pay fixed interest rate for the first three years of the loan. Following this decision, SBI's new base rate will be 8.50% from April 25.

It has also increased the benchmark prime lending rate by the same extent to 13.25% a year, from 13% now. Banks use the base rate as the benchmark for all loans since July 2010. Base rate is calculated by taking into account the cost of deposits and the cost of maintaining SLR and CRR.

Prior to the advent of the base rate regime, banks used to link lending rates to BPLR. The SBI move has fuelled market speculation that other banks may follow the banking leader immediately, but the likes of Bank of Baroda , Punjab National Bank and Union Bank of India ruled out such a possibility. "SBI was behind the curve. They have partially corrected this now," a senior bank executive said. Most other banks have their base rate at 9.5% while ICICI Bank has it at 8.75% a year.

Union Bank chairman MV Nair said his bank will take a call on interest rates after May 3. "We will wait for the RBI policy," he said. PNB chief KR Kamath said: "We are watching the market situation and will probably take a decision after the RBI policy. The regulator is expected to intensify its monetary squeezing policy by raising the key rates.

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