Inflation-focussed RBI hikes rates again, may hold off another revision

October 25th, 2011 - 5:57 pm ICT by IANS  

Mumbai, Oct 25 (IANS) The Reserve Bank of India (RBI) Tuesday hiked key interest rates by 25 basis points — the 13th straight increase to curb inflation — but added that it may hold off another upward revision if inflation comes down as predicted.

The repurchase rate, or the interest the central bank levies on short-term borrowing by commercial banks, has been raised to 8.5 percent from 8.25 percent. Automatically, the reverse repurchase rate, or interest on short-term lending, gets hiked to 7.5 percent from 7.25 percent.

The current increase in repo rate will however, make auto, housing and commercial loans dearer once again.

The rate hikes were effected by Reserve Bank of India (RBI) Governor Duvvuri Subbarao during the second quarter review of the apex bank’s monetary policy for this fiscal.

“The monetary policy tightening effected so far has helped in containing inflation and anchoring inflation expectations, even as both remain elevated. While the impact of past monetary actions is still unfolding, it is necessary to persist with the anti-inflationary stance,” Subbarao said while announcing the measures.

The governor however, said that inflation, which was still way beyond the central bank’s comfort level, would start falling from December and be at 7 percent by March 2012.

This, Subbarao said, would “provide some room for monetary policy to address growth risks in the short run”.

“With this in mind, notwithstanding current rates of inflation persisting till November, the likelihood of a rate action in the December mid-quarter review is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted.”

Commercial banks are widely expected to pass on the interest rate burden to customers, which could made consumer and corporate loans dearer, even while raising the interest outgo on existing loans, along with a longer tenure for repayment.

Effectively, the RBI announced the end of rate tightening cycle, after today’s 25 basis points repo rate hike to 8.5 percent, going to the extent of saying that the likelihood and need for further rate hike is not significant,” said Jay Shankar, chief economist - director, Religare Capital Markets.

“This brings in the much needed certainty in policy trajectory, and should help improve investment climate to that extent, he added.

Industry also heaved a sigh of relief as the RBI signalled an end to the rate hikes and said it was high time the government addressed supply side issues.

“Some areas that require immediate attention include clarity on policies with regard to land and the availability of critical inputs such as electricity,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII).

The central bank also revised economic growth projections for the current fiscal downwards to 7.6 percent from the earlier prediction of 8 percent.

“The growth projection was on the downside mainly on account of slowing down of the global economy and moderating domestic demand,” said the RBI Governor.

“Slower global growth will have an adverse impact on domestic growth, particularly on industrial production, given the rising inter-linkages of the Indian economy with the global economy.”

In the policy review, the RBI also de-regulated savings bank deposit interest rates, which will help individuals earn more on their funds parked with banks, as lenders will compete with each other to get more deposits.

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