RBI hikes key interest rates by 25 bps

Mumbai: Borrowers will have to pay more for their home and auto loans as the Reserve Bank today announced an increase of 25 basis points in key policy rates-- 8th hike in one year--in a bid to contain spiraling prices of essential commodities.

Bankers said they will take a call on rates next month but ruled out an immediate hike in interest rates.

The Reserve Bank of India (RBI) in its mid-quarterly policy review raised repo (short-term lending) and reverse repo (borrowing) rates to 6.75 and 5.75 per cent respectively.

RBI injects liquidity through repo rate, while it absorbs funds through reverse repo window.

Finance Minister Pranab Mukherjee and Planning Commission Deputy Chairman Montek Singh Ahluwalia welcomed the decision, but India Inc expressed fears that the move would hurt growth.

The RBI move apparently dampened the investor sentiment. Reacting to hike in policy rates, the Bombay Stock Exchange benchmark Sensex nosedived by close to 210 points to close at 18,149.87 points.

This is the eighth time the central bank is hiking its key policy rates since March 2010 to fight rising inflation, which was at 8.31 per cent in February, much above the RBI's comfort level of 5-6 per cent.

The central bank upped its March-end inflation forecast to 8 per cent from 7 per cent projected earlier in view of rising global crude oil prices and high food prices at home.

In the global markets, crude rates had shot up to over USD 115 per barrel in the wake of unrest in the Middle-East "It is good. It will have its impact on the inflationary pressure," Mukherjee said hoping that inflation would calm down to 7.5 per cent by March-end.

Ahluwalia said the hike in rates was on expected lines as inflation was high. "I think it is on long expected lines. I don't think markets would be surprised by (RBI key rate hike) given that inflation is not in the comfort level, I think it has done the right thing," he said.

Commenting on the development, bankers said they are unlikely to pass on the policy rate hike immediately to customers and would hold on current rates till March-end.

"I think rates would remain stable during this month. Beyond March, it would depend on various factors, like call money rates..," IOB Chairman and MD M Narendra said.

Similarly, Punjab & Sind Bank Executive Director P K Anand said banks are unlikely to tinker with their rates now and any revision in rates by banks would happen in April.

RBI said the rate hikes are expected to rein in demand-side inflationary pressures and contain the spillover of food and commodity price rise to other sectors.

The Reserve Bank also warned that sharp rise in oil prices following turmoil in the Middle-East and North Africa would have implications for the economy, especially inflation.

"... coming on top of already elevated food and other commodity prices, the spike in (global) oil prices has endangered inflation concerns," RBI said.

Source: Financial Express