Thaindian News

Mumbai, Sep 16 (IANS) Housing, automobile and corporate loans in India are set to become dearer with the central bank Thursday hiking its short-term interest rates for the fifth time this year to tame prices that have pushed the annual food inflation to 15.1 percent.
The repurchase rate now stands revised to 6 percent from the earlier 5.75 percent, while the reverse repurchase rate has been hiked to 5 percent from 4.5 percent after the first mid-quarter review of the monetary policy for this fiscal.

Conducting the review, Reserve Bank of India (RBI) Governor D. Subbarao said even though India’s economic growth remained stable, recent volatility in industrial output remained a concern, along with inflationary expectations that still loomed large.

“Inflation rates have reached a plateau but are likely to remain at unacceptably high levels for some months. The prices of food articles, which rose by 14 percent in August are still contributing to the pressure,” Subbarao said.

“The headline inflation remains significantly above the trend of 5-to-5.5 percent in the 2000s. There is, therefore, need for continued policy response to contain inflation and anchor inflationary expectations,” he added.

The review came against the backdrop of India’s industrial output growing 13.8 percent in July, as against 7.1 percent in the previous month, while the annual inflation rate as a whole declining to 8.51 percent in August from 9.78 percent in the previous month.

The review had an immediate impact on stock markets, with the 30-share sensitive index (Sensex) of the Bombay Stock Exchange (BSE) plunging 113 points to 19,388.65 points, moments after the announcement from the apex bank’s head office at Mint Street here.

But a smart recovery soon after helped the index regain lost ground with an upswing of 134.55 points or 0.69 percent over the previous day’s close.The index, however, again fell to close in the red at 19,417.49 points, down 84.62 points or 0.43 percent.

Industry, however, was both divided as also guarded in its response to the latest policy measures announced by the central bank, hoping this would not prompt commercial banks to hike interest rates.

“This is perhaps a healthy move to address the sustained high inflation which is high on the Reserve Bank of India radar,” said Swati Piramal, president of the Associated Chamber of Commerce and Industry (Assocham).

The Confederation of Indian Industry (CII) said sustaining the current growth rate will require a moderate interest rate environment and hoped the RBI would now hit the pause button on further policy rate hikes in the second quarter review of policy.

“With banks already raising their lending rates, CII is concerned industry may find it difficult to fund capacity expansions and even some existing projects may become unviable,” said chamber director general Chandrajit Banerjee.

But commercial banks indicated that the rate hikes may be passed on to consumers and the corporate sector. “In early October, there could be some revision in interest rates,” said Bank of Baroda executive director R.K. Bakshi.

“Rate of interest may have to go up. Banks have to take a view but till Sep 30, I do not expect any change. Pressure is there to increase rates in the near term,” added Bank of Maharashtra chairman Allen Pereira.

In the previous review, the central bank had stepped up its attack on rising prices and hiked two key short-term rates, while predicting an eventual increase in interest rates on loans and deposits, and raising its forecast on inflation and growth.

This review has seen the fifth such rate hike since the apex bank decided to tighten its monetary policy in January — first on Jan 29, followed by another on March 19 and again on July 2 and then on July 27 — to rein in inflation.

Repurchase rate, often referred to as the short-term lending rate, is the interest the apex bank charges on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for banks, discouraging them to hunt for more funds.

Reverse repurchase rate, referred to as the short-term borrowing rate, is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park funds with the central bank.

The RBI governor said measures taken Thursday will contain inflation without disrupting growth, even as the ongoing process of normalisation of monetary policy would continue.