New Delhi: Reserve Bank of India Governor Raghuram Rajan on Tuesday announced a 25 basis points (0.25 per cent) hike in repo rate or the benchmark rate as widely expected. The RBI’s move may force banks to increase interest rates on loans leading to higher EMIs (equated monthly installments) for existing home loans and costlier retail loans for new customers.
Dr Rajan’s second rate hike in as many months is aimed to fight rising inflation that hit a seven-month high in September. The RBI said headline inflation would have remained above 9 per cent in the coming months in “absent policy action.”
“Overall WPI (wholesale price index) inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response,” Dr Rajan said in his review.
Radhika Rao, economist at DBS told Reuters that today’s move was a follow-through of the hawkish September policy guidance as high and persistent inflation is seen as an impediment to the medium-term growth outlook.
“The new policy approach is a single-minded focus to contain inflationary expectations, with or without support from fiscal policy,” she said.
After the hike, the repo rate or the rate at which RBI lends short term money to commercial banks, has gone up to 7.75 per cent. The cash reserve ratio, or the minimum percentage of the total deposits that commercial banks have to hold as reserves with the central bank, remains unchanged at 4 per cent.
The central bank also rolled back an emergency measure put in place in July to support the slumping rupee. As a result, the Marginal Standing Facility (MSF) rate was reduced by 25 basis points to 8.75 per cent. The move will ease liquidity in the banking system by lowering the cost of borrowing for lenders.
Some bankers like Gagan Banga of Indiabulls Housing Finance told Reuters that a reduction in the MSF rate will keep interest rates on home loans stable.
The rupee trimmed earlier losses to trade flat and the BSE Sensex extended gains after the policy announcement. Banking stocks, most exposed to RBI’s announcement, rose nearly 2 per cent.
“As market expectations have been fulfilled there will not be any knee-jerk reaction across financial markets,” Rupa Nitsure of Bank of Baroda told Reuters. (With Reuters Inputs)