Reserve Bank of India hikes key interest rates

Mumbai, July 2 (IANS) India’s central bank Friday hiked key interest rates by 25 basis points with immediate effect in an attempt to contain soaring inflation, which could make housing and auto loans costlier.

The Reserve Bank of India (RBI) hiked the repo rate by 25 basis points to 5.5 percent and the reverse repo rate by a similar quantum to 4 percent, as part of its ‘calibrated exit from the expansionary monetary policy’, which was part of the stimulus package by the government at the height of the global financial crisis.

The repo rate, which was 5.25 percent prior to Friday’s revision, is the interest charged by the central bank on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for commercial banks.

The reverse repo, which stood at 3.75 percent, is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park their funds with the RBI.

Explaining its decision, which came after the stock markets closed, the RBI said a combination of factors, including soaring inflation, which had spread from food prices to other items, prospects of a normal monsoon, sustaining economic recovery and upbeat industrial production numbers prompted it to raise the rates.

‘The developments on the inflation front raise several concerns. This mid-cycle policy action has been warranted by the evolving macroeconomic situation,’ said the RBI in a statement.

Banks have been under pressure because of a huge payout by telecom operators to the government on account of of 3G and broadband wireless access (BWA) license fees.

The RBI had introduced measures to ease liquidity in May to counter the impact of this payout and said Friday that it was continuing these measures, as it did not want to hamper borrowing activities.

‘Easing liquidity and raising rates at the same time may seem apparently inconsistent. It should be noted in this context that the liquidity easing measures have become necessary to manage what is essentially a temporary and unanticipated development,’ said the statement.

The rate hikes come after the government’s decision Monday to free fuel prices, which according to Kaushik Basu, chief economic advisor to the finance ministry, could cause a short-term spike in inflation.

‘This was very much required, inflation was really getting out of hand. The situation is so dynamic these days that the RBI has to stay vigilant and not wait too long,’ Crisil Principal Economist D. K. Joshi told IANS.

‘We could see interest rates on housing, car loans going up. I expect another round of hikes, by 25 basis points, on July 27,’ Joshi added. The RBI is scheduled to take up its quarterly review of the monetary policy July 27.

The RBI said the monetary measures ‘should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process’.

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