RBI raises key rates by 25 bps

Mumbai: All loans are set to become costlier, with the Reserve Bank of India (RBI) today raising key interest rate for the 12th time since March, 2010, by 25 basis points to rein in high inflation.

With today's rate hike, the short-term lending (or repo) rate at which banks borrow from the RBI stands increased to 8.25 per cent and the short-term borrowing (reverse repo) rate at which banks park their funds with the RBI to 7.25 per cent.

Headline inflation rose to 9.8 per cent in the month of August from 9.2 per cent in July this year.

Despite the RBI hiking rates several times since March, headline and food inflation are close to double digits.

"As such, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," the RBI said in its mid-quarter review of the monetary policy.

Going forward, the RBI's stance will be influenced by signs of downward movement in the inflation trajectory, to which a moderation in demand is expected to contribute, besides the implications of global developments, it said.

"The step is consistent with the RBI monetary stance for the first half of 2011-12 and overall concerns on growth sustainability in the medium term.

"I am hopeful that measures taken would get us back a more comfortable inflation situation earlier rather than later, while having scope for growth to pick up in the second half of the year," Finance Minister Pranab Mukherjee said.

Commenting on the rate hike, Indian Overseas Bank Chairman and Managing Director M Narendra said banks need to pass on the hike to customers as the cost of funds has gone up.

"I believe banks would wait till the month-end before taking a call on an interest rate hike," he said.

Going forward, RBI said the monetary stance will be "influenced by signs of downward movement in the inflation trajectory..."

GDP growth during the first quarter (April-June) of the 2011-12 financial year moderated to an 18-month low of 7.7 per cent from 8.8 per cent in the corresponding period year ago.

The slowdown was also reflected in industrial output growth rate which dipped in July to 3.3 per cent, the lowest in 21 months.

The Reserve Bank said food inflation is near double digits, despite the normal monsoon, underlining the fact that it is driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon.

It further said that hike in petrol prices by Rs 3.14 per litre, with effect from September 16, 2011, will have a direct impact of 7 basis points on WPI inflation, in addition to an indirect impact with a lag.

RBI's decision, though praised by Planning Commission Deputy Chairman Montek Singh Ahluwalia and PMEAC chairman C Rangarajan, evoked sharp reaction from the industry chambers.

Ficci Secretary General Rajiv Kumar said, "This rate hike will only exacerbate the current fears of impending slowdown."

However, PMEAC chief Rangarajan said, "The RBI has taken the correct decision. In the context of rising inflation, RBI had no other option but to raise interest rates."

Expressing similar opinion, Ahluwalia said, "The rate hike is within a range that is not unreasonable" as inflation has continued to remain high.

Source: Financial Express