February 15, 2007: In response to the Reserve Bank of India's latest round of hikes in the cash reserve ratio (CRR), a slew of state-run banks decided to make the first moves in raising lending rates, upping them by 50 basis points across the board on Wednesday.
Some even said a hike in home loan rates would be announced shortly, virtually disregarding finance minister P Chidambaram's exhortation to hold home loan rates for now.

Leading state-run banks like Punjab National Bank, Bank of Baroda, Bank of India and United Bank of India hiked their rates after the RBI's two-phase CRR hike announced on Tuesday in a move to contain inflation, which spiralled to 6.58% last week.

However, for some banks, the hike in prime lending rates (PLR) does not immediately include home loan rates, which they are still reviewing. Addressing reporters in New Delhi, SC Gupta, CMD, PNB, however, sought to justify a possible home loan rate hike, saying: "The finance minister had made a request. It was not a mandate."
"We will take a decision about home loans afterwards,'' said a senior BoI official. AK Khandelwal, CMD, BoB, however, said home loans were not an immediate priority while raising rates.

The CRR hike will suck out around Rs 14,000 crore from the banking system, thereby tightening liquidity.

Kolkata-based UBI hiked the benchmark prime lending (BPLR) rate by 50 basis points to 12.5%, effective February 19, 2007. All rates linked to the BPLR will now go up, including floating home loan rates. "Many banks can be expected to hike their PLRs next week," said Indian Banks' Association CEO HN Sinor. "Some of them could even affect a 1% hike," he added.

Reacting to the CRR hike, the bond markets witnessed an overall fall in prices for papers across all maturities. The benchmark yields on the 7.59% government stock ended the trading session at 8.08%, against the previous close of 7.96%. "As expected, money markets have taken the RBI move as negative, and as a result, yields have breached the 8% levels," said a private sector banker.

BoI has revised its PLR from 12% to 12.5% with effect from February 15. PNB increased its benchmark PLR by 50 basis points from 11.75% to 12.25%, in a bid to protect its net interest margin. PNB's total exposure to the housing sector is estimated at Rs 7,000 crore. However, 80% of this is below the Rs 20-lakh level. Gupta also pointed out that with this hike in CRR, the bank would face a shortage of about Rs 600-650 crore.