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RBI Remains Hawkish, Raises Rates By 50 BPs

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Personal and corporate loans became more expensive on Tuesday with the RBI raising key interest rates sharply for the third time in the last three months, by 0.50 per cent, to arrest price rise. The central bank, in its quarterly review of the monetary policy, has also revised its fiscal-end inflation projection to 7 per cent from 6 per cent earlier. It has retained the growth project for the current fiscal at 8 per cent. With a 50 bps hike, the repo rate (at which the RBI lends to banks) would be 8 per cent and the reverse repo rate (at which it borrows from banks) to 7 per cent. However, the cash reserve ratio (CRR), the amount all banks need to park with RBI, remains unchanged at 6 per cent. The rate increase is its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks. All loans, including auto, home, personal and other corporate borrowings, are expected to cost more following the RBI's decision. Expectedly, industry expressed its disappointment over the sharp increase in interest rates, saying the move would harm the investment sentiment. "We thought it would be 25 basis points. The RBI has seen something which industry has not... investment sentiments will be muted in the next six months," Ballarpur Industries Limited Chairman Gautam Thapar told PTI. The stock market also reacted sharply, plunging by over 300 points within minutes of the RBI's policy announcement. Still, wholesale price index inflation was 9.44 per cent in June, more than double the RBI's comfort level, and high prices are expected to persist in coming months. "Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance," RBI Governor Duvvuri Subbarao wrote in his quarterly policy review. The RBI stuck with its forecast for economic growth in the current fiscal year of around 8 perc ent. While some interest-rate sensitive sectors are showing signs of moderating growth, it said, "there is no evidence of a sharp or broad-based slowdown as yet." All 23 analysts in a Reuters poll last week had expected the RBI to raise rates by 25 basis points on Tuesday, although 9 of them expected a pause in the tightening cycle after July amid signs of slowing domestic growth and global uncertainty. Recent industrial output and manufacturing data was the worst in nine months, while sales of cars have slowed sharply and loan demand is easing, complicating the central bank's inflation-fighting task. Subbarao said Tuesday's policy actions are expected to "maintain the credibility of the commitment of monetary policy to controlling inflation." The measures are also expected to "reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required," Subbarao said in his report. January-March quarter growth was a worse-than-expected 7.8 percent, with economists expecting India to grow at 7.9 percent in the fiscal year that began in April, according to a Reuters poll, less than the 8.5 percent growth in the fiscal year that ended in March. "Notwithstanding signs of moderation, inflationary pressures are clearly very strong... inflation continues to be the dominant macroeconomic concern. On the basis of this assessment, it has been decided to increase policy repo rate by 50 basis points from 7.5 to 8 per cent with immediate effect," RBI Governor D Subbarao said while unveiling the the monetary policy. Inflation, currently hovering above 9 per cent, he said, would continue to guide the policy stance in future. The RBI's next review is scheduled on September 16. (Agencies)