Mumbai: 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
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
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.