The reserve bank of Indian (RBI) today raised its short-term lending and borrowing rates by 25 basis points each today to control spiralling prices of essential commodities.

The repo rate has been hiked to 6.75% and the reverse repo rate to 5.75%, respectively. However, most analysts have predicted a further hike in key rates during the policy review in May. Moreover, RBI has also increased its inflation estimate for March to 8% from the 7% projected earlier.

The Reserve Bank of India is widely expected to increase short-term interest rates at its policy review in April and a slight majority of analysts surveyed also see it further increasing banks’ reserve requirements.

Wholesale price index inflation, which reached 8.56 percent in January, was forecast to rise to 9.9 percent at the end of this quarter before easing to 9 percent at the end of June, 7.5 percent at the end of September and 6 percent at the end of the year, according to median forecasts.

An increase in interest rates by the Reserve Bank would be the first since it began slashing rates in late 2008 to help insulate the country from the global downturn, although it has taken other steps to tighten monetary policy in recent months.

Rising inflation and a rebounding economy, however, will likely compel the Reserve Bank of India (RBI) to tighten policy rates, the poll showed.

“We expect inflation to peak in coming months, as the statistical base effect will become more favourable. However, the risk is on the upside, since sequential inflation itself has been fairly elevated in recent months,” said Sebastien Barbe, head of emerging market research and strategy for Credit Agricole CIB.

“In addition, global food prices and local weather conditions also fuel a risk that inflation may be stronger than expected in H2. This may incite the RBI to be vigilant and tighten significantly in coming quarters,” he added.

The Reuters poll showed that 21 out of 23 economists see the RBI raising its benchmark reverse repo rate, at which it absorbs excess cash from the banking system. Of the 21 expecting an increase, 10 expect a 25 basis point rise in April and 11 see a 50 basis point rise.

Twenty one out of 24 economists polled expect the RBI to raise the repo rate, at which it lends funds to banks. Of those expecting an April increase, 12 expected a 25 basis point rise and nine expect a 50 basis point increase.

Thirteen out of 22 economists polled expected the RBI to raise the cash reserve ratio (CRR), the percentage of deposits banks must keep with the central bank, by up to 50 basis points in April. The RBI raised the CRR by a sharper-than-expected 75 basis points at its last review in late January.

The outlook for the RBI policy tightening is little changed from a Reuters survey conducted shortly after the RBI’s January policy review.

The survey showed the economy is forecast to grow 7.2 percent in the fiscal year that ends on March 31, in line with government estimates, and 8.0 percent in 2010/11.

None of the analysts surveyed expect any changes to the statutory liquidity ratio, the percentage of deposits banks must invest in government bonds, during 2010.

Duvvuri Subbarao, the Reserve Bank of India (RBI) governor, left key interest rates unchanged in the second quarter monetary policy review. However, by tweaking a few provisions, he signaled his focus on controlling asset prices and monetary inflation.

“The RBI has focused on controlling asset prices and inflation by using alternative measures instead of hiking interest rates since sustainable signs of economic growth are not yet fully visible and credit growth has not picked up meaningfully,” said Vikram Kotak, chief investment officer, Birla Sun Life Insurance.

The RBI raised the provisioning requirement for loans to the commercial real estate sector to 1% from the current 0.4%. What this means is that banks, which so far had to set aside Rs4 as provision for every Rs1,000 loan to real estate companies, will now have to keep aside Rs10.

This underlines the RBI’s concern over the growth in loans to real estate firms.

For a one-year period till August 28, 2009, banks had lent Rs28,353 crore to the real estate sector, up 41.5% in comparison to the same period last year. In contrast, home loans amounted to Rs14,668 crore, up by only 5.4% over the same period last year.

These loans have helped developers keep the prices up, even in a relatively weak market. “The central bank will have to keep a vigil on any an asset bubble building due to excess liquidity,” said Navneet Munot, chief investment officer of SBI Mutual Fund. Harsh Roongta, CEO, Apna Paisa, added: “It (the move) will serve to increase the cost of landing to the real estate sector. It is possibly a welcome step to ensure that no bubble gets built up based on loans.”

The stock market did not take kindly to the change. The 30-share BSE Sensex ended the day 387.1 points, or 2.31%, down to close the day at 16353.40 points. Bank and realty stocks fell even more, with the 18-share BSE Bankex falling 3.8% and the 14-share BSE Realty Index falling 6.24%.

Big developers haven’t liked this move either. “Increasing, the risk weightage for commercial real estate is a negative signal, and is perhaps not required at this early stage of economic revival. If the same had been pushed down a few quarters later, it would have been better,” said Rajeev Talwar, executive director, DLF Ltd Group. He felt the move would discourage developers from going ahead with commercial projects. “To send a negative signal to any segment of the realty sector is not called for at the moment,” he said.

Industry experts believe that the move will prompt banks to be cautious while disbursing loans to avoid further non performing assets (NPAs) on their books. Ravi Ramu, director of Bangalore-based developer Purvankara Projects Ltd, said, “Banks will not lend to smaller developers who run the risk of getting into project execution problems.”

An increase in provisioning requirements would also mean that banks will now lend to developers at higher interest rates. This, in turn, may force developers to push prices up, at least marginally which could mean higher prices for buyers. “Developers would find the cost of loans going up, which can adversely impact their liquidity position and might force them to pass on the prices to the end users,” said Priyankar Bhikshu, head of consulting & research – India, DTZ.

This could also mean higher prices — at least in the affordable housing segment as no developer would like to pay from their pockets.Hari Prakash Pandey, vice-president (finance), Housing Development and Infrastructure Limited (HDIL), said, “Currently prices have already moved up. Even if HDIL has to increase price then it would not be more than 5% of the flat price.”

IDBI to cut home loan rates but freefall in Indian interest rates has come to and end.

Union Bank of India (UBI), today said that it has reduced interest rates on its housing and auto loans as a part of a festival offer. The public sector lender would now offer home loans at 8.50 per cent for the first three years and at floating rate linked to its benchmark prime lending rate from the fourth year onwards for loans up to Rs 50 lakh, a press release issued here said.

Housing Development Finance Corp (HDFC) has cut Indian interest rates by 50 basis points (100 basis points = 1%) for the Rs 30 lakh-Rs 50 lakh slab. The new rate for this bracket will be 9% per annum, down from 9.5% earlier, a senior HDFC official said.

Earlier, HDFC had three slabs for Indian home buyers. It charged 8.75% per annum for loans up to Rs 15 lakh, 9% for loans between Rs 15 lakh and Rs 30 lakh and 9.5% for loans of over Rs 30 lakh. Now the mortgage finance major has introduced a new slab of loans at 9% for Rs 15 lakh and Rs 50 lakh. After this rejig, only Indian home buyers opting for loans of over Rs 50 lakh will pay an interest rate of 9.5%. Earlier even home buyers taking loan of above Rs 30 lakh were paying at the rate of 9.5%.

The Indian finance Minister today announced an interest subsidy of 1 per cent for one year on Indian housing loans of up to Rs 10 lakh for properties worth less than Rs 20 lakh. The move has been widely welcomed by indian realtors and home loan companies according to the Business Standard. The measure is expected to cost the exchequer Rs 1,000 crore.

Assuming a monthly saving of Rs 60 per lakh, today’s announcement implies that an Indian borrower saves about Rs 7,200 on a 15-year loan of Rs 10 lakh. The interest rate subvention will be routed through the scheduled commercial banks and the housing finance companies registered with the National Housing Bank.

The Royal Institution of Chartered Surveyors hopes the Finance Ministry will consider hiking the housing loan interest deduction limit and bringing down home loan interest rates in the coming Budget.

A press release from RICS quoting its Managing Director and Country Head, Mr Sachin Sandhir, says RICS believes that the Ministry of Finance will consider the proposals submitted by the Housing Ministry and increase the housing loan interest deduction limit to Rs 2.5 lakh or Rs 3 lakh a year along with lowering interest rates to 7.5 per cent for loans in the range of Rs 5 lakh to Rs 30 lakh.

Given the President of India’s ambition of making India slum free in five years, it would be imperative to provide fiscal concessions for building low-cost houses. A dedicated fund for affordable housing and reintroduction of concessions under Section 80IB (10) of the Income-Tax Act, which would encourage construction of small residential units at affordable prices, are some of its expectations.

This provision would allow deduction at 100 per cent of the profits from a housing project that fulfils special conditions such as minimum plot area of one acre and maximum built-up area of 1,000 sq.ft for Delhi or Mumbai and 1,500 sq.ft for other places.

Waiver or reduction in stamp duty, value added taxes and other government taxes for economically weaker sections (EWS), lower income group (LIG) housing and restoration of tax holidays for low-cost housing projects would also support this segment.

As the industry’s wish-list is multi-fold, other announcements likely to bring joy to the sector are: further relaxation of ECB and FDI norms; rationalisation of stamp duty and registration charges; confirmation on abolition of service tax on renting immovable property already announced by the high court; clarity on extension of tax waiver for STPI units; extension of tax holiday under Section 80-IA (4)(iii) for developers who build industrial parks, which in turn would boost the otherwise impacted IT industry.

RICS hopes that levy of fresh taxes which could adversely impact the sector are avoided.

ICICI Bank said on Thursday it was cutting its lending rates by 50 basis points from

The benchmark advance rate, or the rate that it charges its top customers, will drop to 15.75 percent from 16.25 percent.

It also cut rates for retail customers by 50 basis points. The bank had lowered lending rates by 50 basis points in late April.

ICICI Bank, the country’s second-largest private sector lender has now cut interest rates on new home loans with immediate effect.

A bank spokesperson said new home loans of up to Rs 20 lakh would come at an interest rate of 9.75 per cent against 10 per cent now.

For home loans of Rs 20 lakh to Rs 30 lakh the interest rate has been reduced from 10.5 to 10 per cent. New home loans of over Rs 30 lakh will carry a rate of 11.5 per cent, against 12 per cent at present.