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Loans set to head north as RBI hikes interest rates |
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Written by priyank
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Thursday, 28 July 2011 05:38 |
Loans set to head north as RBI hikes interest rates
Mumbai: India's central bank on Tuesday (July 26) sharply hiked key rates by 50 basis points in the 11th such exercise since January 2010 to tame stubborn inflation, setting the stage for auto, housing and commercial loans to become dearer once again.
The repurchase rate, the interest the central bank levies on short-term borrowing by commercial banks, has been hiked to 8 per cent from 7.5 per cent and reverse repurchase rate, or interest paid on short-term lending, raised to 7 per cent from 6.5 per cent.
The rate hikes were effected by Reserve Bank of India (RBI) Governor Duvvuri Subbarao during the first quarterly review of the RBI's monetary policy for this fiscal conducted at his headquarters in Mumbai.
While the rate hike was expected, the quantum of increase took the financial world by surprise. Yes Bank was first to react, hiking its base lending rate by 50 basis points to 10.25 per cent.
Agreeing with RBI's action, Finance Minister Pranab Mukherjee said the central bank had sought to give a "strong signal to further moderate inflation and check inflationary expectations"
"With this policy adjustment, we will be able to get back to a more comfortable inflation situation that takes us to the year-end inflation level of six to seven per cent," Mukherjee said in a statement. The RBI governor himself pegged the year-end inflation projection at 7 per cent.
"Consumer loans will become terribly expensive," said Deepak Parekh, chairman of Housing Development Finance Corporation. He said, "Credit demand will moderate and competitiveness of companies will go down.” The markets, too, did not take kindly to the policy update.
The sensitive index (Sensex) of the Bombay Stock Exchange (BSE) closed 353.07 points or 1.87 per cent lower, while at National Stock Exchange, the broader S&P CNX Nifty ended 105.45 points or 1.85 per cent down. All sector-specific indices also closed lower.
"Notwithstanding signs of moderation, inflationary pressures are clearly very strong," Subbarao told the chief executives of commercial banks after the policy update, while defending the policy action.
"Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for wholesale inflation for March 2012 is revised upward from 6 per cent with an upside bias," he added. The new projection on inflation is 100 basis points above, at 7 per cent by year-end.
On growth, Subbarao said amid a slowdown in the factory output growth, the robust export performance should augur well, but the performance of monsoon so far could exert pressures on the yields of coarse grains, pulses, oilseeds and cotton.
"Against this backdrop, the baseline projection of real gross domestic product growth is retained at 8 per cent, as set out in the May 3 policy statement," said Subbarao, adding that the stance of the RBI will be to tame inflation and maintain growth.
Soruce: Ahmedabad Mirror
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