Mumbai: All loans are set to become costlier as the Reserve Bank on Tuesday increased the key interest rate by 25 basis points to check rising prices, at the risk of sacrificing some growth.
This is the 13th time the central bank has increased the interest rate since March, 2010.
In a major policy decision, the Reserve Bank of India (RBI) Governor Duvvuri Subbarao also deregulated savings bank deposit rates with immediate effect, a step that could fetch better returns for deposits as banks would have to compete to attract depositors.
With today's increase, the repo rate (at which RBI lends money to banks) has gone up to 8.5 percent, while the reverse repo (a rate at which banks park their funds with RBI) would remain at 7.5 percent.
On the economic growth, RBI lowered its forecast to 7.6 percent for the current fiscal, down from its earlier projection of 8 percent.
Commenting on RBI's rate hike, leading bankers indicated that they will raise interest rates following the increase in cost of funds for banks.
"Changing the policy stance when inflation is still far above the tolerance level entails risks to the credibility of the Reserve Bank’s commitment to low and stable inflation," the policy document said, even as it admits that growth momentum has slowed down.
It said inflation, at present ruling near the double- digit mark, will start cooling by December this year and is likely to come down to 7 percent by March, 2012.
RBI has kept bank rate and cash reserve ratio (CRR) unchanged at 6 percent each, while retaining the statutory liquidity ratio at 24 percent.
Commenting on the monetary policy announcements, Finance Minister Pranab Mukherjee said, "this decision has been taken by Governor to affirm (RBI's) commitment to tackle inflation as the headline inflation is still high. I do hope as a result of it, (inflation) would moderate in course of time".
He, however, admitted "it would have some impact on growth also. But the situation is difficult and in difficult situation we cannot expect to have a simple situation".
The industry, which has been seeking a pause in interest rate rike, also expressed concerns, saying the rate hike would weaken economic growth.
"Another interest rate hike by the RBI will further weaken economic growth and impact all other indicators," Assocham President Dilip Modi said.
The industry, however, can heave a sigh of relief as RBI hinted that the likelihood of a hike in December is "relatively low".
Tuesday’s hike is the 13th since March, 2010. The series of rate hikes has cumulatively increased interest rates by 525 basis points.
The policy, according to RBI, is expected "to continue to anchor medium term inflation expectations", while stimulating investment activity to support growth.
Reacting to the announcement, Oriental Bank of Commerce Executive Director S C Sinha said, "Banks are likely to increase both lending and deposit rates following the RBI action. There could be minimum 25 basis points rise in lending rate."
IDBI Bank Executive Director R K Bansal said lending rate would certainly go up on two counts-- one RBI has raised policy rate and second deregulation of saving rate.
These two steps will increase cost of funds for banks, he added.
First Published: Tuesday, October 25, 2011, 08:42