The Reserve Bank of India (RBI) today raised interest rates by a higher-than-expected 50 basis points, indicating the seriousness of the fight against high inflation, despite slowing growth. As a result of this housing, vehicle, consumer loan interest rate will go up. There is chance of hike in the Bank Fixed Deposit interest rate also (0.25% to 0.50% rate hike expected), that will come to know within a week time.
The central bank said it was increasing the repo rate at which it lends to banks to 8% from the previous 7.5%, and the reverse repo rate, to 7% from 6.5%. This is more than the 25 basis points increase that the market was expecting. However, the cash reserve ratio (CRR) has been left unchanged at 6%. The indices slid immediately after the announcement with the BSE Sensex down by over 300 points (or 1.5%) and the S&P CNX Nifty losing nearly 100 points (or about 1.7%). This is the 11th rate increase by the RBI since March 2010, which is seen as the most aggressive among central banks in fighting inflation.
The whole price index inflation was at 9.44% in June, more than double the RBI's comfort level, and the fear is that high prices could persist through the end of the year.
The RBI also revised upwards its outlook for wholesale inflation for the current year to March 2012 to 7% from the earlier 6%. RBI governor D Subbarao said in his policy review statement, "Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance." But the central bank stuck with its forecast for economic growth in the current year at around 8%, saying that while some interest-rate sensitive sectors have shown signs of moderating, "there is no evidence of a sharp or broad-based slowdown as yet".
"RBI's announcement of 50 basis points increase in repo rate comes as a major disappointment to the industry. With the growth momentum already under pressure, this move will further hurt the future prospects.Analysts widely expected the RBI to raise rates by about 25 basis points, while some believed there would be a pause in the tightening cycle due to signs of slowing growth and global uncertainty. Latest industrial output and manufacturing numbers were the worst in nine months and January-March quarter growth was a worse-than-expected 7.8%.
"The RBI's action to raise policy rate by 50 bps against market expectation of 25 bps in part reflects its desire to send a strong anti-inflationary message to market participants and in part reflects front loading of rate hikes
Regards
Prakash Nair
