RBI increases Repo Rate; loans to be costlier

Oommen Ninan

The Reserve Bank of India on Tuesday increased the short-term indicative policy rate (repo rate) by 25 basis points, with immediate effect, from 8.25 to 8.5 per cent, with the hope that a further rate hike may not be warranted as inflation is likely to fall in December 2011. It has also deregulated the savings bank deposit interest rate with immediate effect.

This is the 13th hike in policy rate since March 2010, which means the lending rates offered by banks will go up further. Already all kinds of loans, including housing loan, are costlier.

Repo rate is the rate at which the banks borrow funds from the central bank.

“Notwithstanding the current rates of inflation persisting till November, the likelihood of a rate action in the December mid-quarter review is relatively low... further rate hikes may not be warranted,” said D. Subbarao, Governor, RBI, while announcing the Second Quarter Review of Monetary Policy for 2011-12.

The central bank believes that price rise will begin falling in December 2011 and then continue down a steady path to 7 per cent by March 2012. “It is expected to moderate further in the first half of 2012-13,” said Dr. Subbarao.

He said price rise continued to be a major macroeconomic concern. It remained stubbornly high, averaging 9.6 per cent during the financial year so far. Inflation has been broad-based, and driven by all the three major groups, primary articles, fuel and power, and manufactured products.

However, the RBI revised downward the projection of growth rate for 2011-12 to 7.6 per cent from 8 per cent announced in the May Annual Statement and the July Quarterly Review.

“Investment demand has slackened, reflecting slower clearance and execution of projects, concerns about inflation and rising interest rates,” said Dr. Subbarao, adding, “As inflation begins to decline, there will be growing room for the policy stance to give due consideration to growth risks.”

With the decision on deregulating the savings bank deposit interest rate, banks are free to determine their rates. However, the RBI said, each bank would have to offer a uniform interest rate on savings bank deposits up to Rs. 1 lakh, irrespective of the amount in the account within this limit.

For savings bank deposits over Rs. 1 lakh, the banks can provide differential rates of interest, if it so chooses.