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RBI's tough tone surprises, repo rate hiked by 0.25%

Concerned over high inflation, the Reserve Bank on Friday raised key interest rates by 0.25 percent, its 12th such hike since March, 2010, making auto, home and other loans more expensive.

Mumbai: Concerned over high inflation, the Reserve Bank on Friday raised key interest rates by 0.25 percent, its 12th such hike since March, 2010, making auto, home and other loans more expensive.

Following the increase, the short-term lending (repo) rate stands at 8.25 percent and the short-term borrowing rate (reverse repo) is 7.25 percent.

The RBI, while announcing its mid-term review of the monetary policy, kept all other rates and ratios unchanged.

"The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Bank's comfort zone," the central bank said.

Despite the RBI increasing key rates several times since March, 2010, inflation shot up from 9.2 percent in July to 9.8 percent in August this year.

Going forward, the 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 percent from 8.8 percent in the corresponding period year ago, following a slowdown in industrial output growth during July to 3.3 percent, the lowest in 21 months.

The RBI 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.

After a slight moderation in July, non-food manufactured products inflation rose again in August, suggesting continuing demand pressures, it said.

For the week ended September 3, food inflation stood at 9.47 percent.

The monsoon has been normal so far, it said, adding that the first advance estimates for the 2011-12 kharif season hint at record production of rice, oilseeds and cotton, though output of pulses may decline.

Meanwhile, it said the 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.

The RBI said as the monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in the form of a further moderation in demand and reversal of the inflation trajectory toward the latter part of the 2011-12 financial year.

As such, it said, 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.

Monetary transmission strengthened further with 45 scheduled commercial banks raising their base rates by 25-100 basis points after the RBI's last review in July. Consequently, the base rate of various banks averaged 10.75 percent in August, up from 10.25 percent in July.

Commenting on the rate hike effected by the RBI, Indian Overseas Bank Chairman and Managing Director M Narendra said the banks need to pass on the hike to customers as their 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.

Echoing similar views, Corporation Bank Chairman and Managing Director Ramnath Pradeep said, "Banks will have to raise rates, but when and how will be decided by individual banks, depending on their asset liability conditions."

According to Punjab and Sind Bank Executive Director P K Anand, the impact of the policy rate hike will take effect with a time lag.

The banks, he said, will maintain the current rates at least for the next 15 days and take a call on revising them depending on credit demand.

The RBI noted that developments in the global economy over the past few weeks are a matter of serious concern. The growth momentum is weakening in the advanced economies amid heightened concerns that the recovery may take longer than expected.

Although India's exports have performed extremely well in recent times, this trend is unlikely to be sustained in the face of weakening global demand, it said.

This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that the risks to the growth projections for 2011-12 made in the RBI's July review are on the downside, it added.

Many indicators point to moderating growth. Both headline and non-food manufactured products inflation are at uncomfortably high levels. Crude oil prices remain high. In addition, food price inflation has persisted, notwithstanding the normal monsoon, it said.


From Zee News

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