Credit Policy: RBI hikes repo rate by 25 bps to 8.25%

Continuing with its anti-inflationary stance, the Reserve Bank of India (RBI) has raised the benchmark interest rates by quarter of a percent point on Friday, while keeping cash reserve ratio (CRR) rate unchanged.

The decision comes as the authorities struggle to control near double-digit inflation, which is uncomfortably high for more than two years.

The repo rate now stands at 8.25%, while the reserve repo gets adjusted to 7.25%. The CRR remains unchanged at 6%.

The hike in rates was along expected lines. In a poll of bankers and economists by CNBC-TV18, 70% said the RBI will hike rates by 0.25% while only 20% believed that there will be no hike this time.

The RBI has been one of the most aggressive central banks in the world, however, price pressures still remain high, mainly due to strong demand pressures that have spread from food to other commodities.

The wholesale price index, India's main inflation gauge, rose 9.78% in August, higher than the median forecast for a 9.6% rise in a Reuters's poll and above the 9.22% recorded for July.

Inflation has been much above the comfort zone, the RBI official told reporters adding, "We will continue with the current anti-inflationary stance."

The RBI monetary tightening is impacting the country's economic growth, finance minister Pranab Mukherjee told reporters on Friday, after the central bank delivered its 12th rate hike in the last 18 months. "I am hopeful the measures taken will help control inflation," he said adding, "…headline inflation is a matter of concern."
He was also optimistic of growth picking up in the second half of the year.

When the repo rate increases, borrowing from RBI becomes more expensive. As a result, all loans -- personal and corporate -- are likely to become costlier and home loan EMIs will increase once banks hike their base rate - the rate to which most retail loans are pegged.

RBI believes the global economic environment has worsened and the recent developments in them a matter of "serious concern". It sees a downside risk to July growth projection.

"The pace of exports is unlikely to sustain on weak demand," RBI said.
GDP growth during the first quarter (April-June) of the 2011-12 financial year moderated to an 18-month low of 7.7% from 8.8% in the corresponding period year ago, following a slowdown in industrial output growth during July to 3.3%, the lowest in 21 months.

Source :www.moneycontrol.com

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Gaurav Agarwal
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DENIP Consultants Pvt Ltd