Home, auto loans costlier as RBI hikes policy rate

Mumbai, Sep 20 (IANS) Home, auto and other loans are set to become costlier as the Reserve Bank of India (RBI) Friday unexpectedly hiked its key policy interest rate by 0.25 percent, saying inflation remains worrisome.

The rupee and stock markets slumped on the central bank's move.

In his first monetary policy review after taking charge at Mint Street Sep 4, RBI Governor Raghuram Rajan, however, partially rolled back the measures taken by his predecessor D. Subbarao.

The RBI increased the repurchase or repo rate by 0.25 percent to 7.5 percent. Repo rate is the what commercial banks pay when they borrow short-term money from the RBI.

The reverse repo rate or the interest rate that RBI pays to the commercial banks on their short-term deposits, is adjusted to 6.5 percent from the earlier 6.25 percent.

These are the two key policy rates that determine lending and borrowing rates by the commercial banks. The RBI move will make home, auto and other loans costlier and worsen the industrial and overall growth situation which is already sluggish.

The RBI policy announcements had a direct impact on the stocks and currency markets. The benchmark Sensex of the Bombay Stock Exchange tumbled by almost 600 points. And the Rupee slipped to 62.61 against a dollar.

Addressing a media conference after the monetary policy announcement, Rajan said the central bank had tried to strike a balance between growth and inflation.

"Priority of the central bank has always been both inflation and growth."

Agreed Planning Commission Deputy Chairman Montek Singh Ahluwalia. "I think it is a quite balanced statement actually. He (RBI Governor Rajan) has done something which will ease liquidity and at the same time try to send the signal that RBI is concerned about bringing inflation down," Ahluwalia said.

Reacting on the RBI move, State Bank of India (SBI) Chairman Pratip Chaudhuri said the lending and borrowing rates were likely to go up.

The country's largest lender had hiked the lending and term-deposit rates Thursday, a day before the RBI policy announcements.

The RBI reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 percent to 9.5 percent with immediate effect.

The central bank had hiked the marginal standing facility rate to 10.25 percent in mid-July to support the bruised rupee.

The Cash Reserve Ratio (CRR), the proportion of money that commercial banks must keep with the central bank, has been kept unchanged at 4 percent.

The minimum daily maintenance of CRR has also been reduced from 99 percent of the requirement to 95 percent effective from the fortnight beginning Sep 21, the RBI said.

The central bank's surprise move of hiking the key policy interest rate came just a few days after the government data showed a sharp jump in inflation.

The headline inflation, based on wholesale prices rose to 6.1 percent in August, the sharpest pace in six months, driven by more than 18 percent jump in food prices, according to government data released earlier this week.

"The intent here is that when the repo rate becomes the effective policy rate, it should be consistent with inflationary conditions in the economy. On net, these measures will reduce the cost of bank financing substantially while allowing us to take an appropriately precautionary stance on inflation," Rajan said.

On US Federal Reserve stimulus move that had led a sharp rally in the Indian stocks and currency, Rajan said Indian should use this temporary external relief as an opportunity to make its system "bullet proof".

"Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike," Rajan said.

The US central bank Wednesday decided to continue with its $85 billion monthly bond-buying programme, known as Quantitative Easing (QE) 3. The speculation of cut in the stimulus had led a huge sell off in the Indian stock markets and depreciation in rupee.

Reacting to the RBI move, FICCI president Naina Lal Kidwai said: "The increase in the repo rate by 25 basis points has come as a surprise to us."

Kidwai said India Inc. was expecting a cut or at least a status quo in the policy interest rate and the hike in repo rate would dampen investments.

"High interest rate has been identified as a major barrier to boosting growth by various studies and surveys. Entrepreneurs are holding on to their investment plans pending any relaxation in monetary policy by the RBI," she said.

"The increase in repo rate could have been avoided as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation," said Confederation of Indian Industry (CII) director general Chandrajit Banerjee.

Matches

MORE TOP STORIES TODAY

Kallis, Narine star in Knight Riders’ crushing win

Kallis, Narine star in Knight Riders’ crushing win

An all-round display saw Knight Riders thump Mumbai Indians by 41 runs in the IPL-7 opener. More »

Pietersen to miss Delhi's first game

Pietersen to miss Delhi's first game

The former England batsman will have to lead the franchise as he is out of the match against Bangalore with a finger injury. More »

Srinivasan named in fixing report: SC

Srinivasan named in fixing report: SC

The court emphasised that the tainted administrator can no longer work for the BCCI. More »

'If you do the wrong thing it will be found out'

'If you do the wrong thing it will be found out'

'Everyone knows what is right and what is wrong and if you do the wrong thing it will be found out' More »

Why I'm not looking forward to the IPL

Why I'm not looking forward to the IPL

Welcome to another season of a league that many watch but few trust. More »

Mitchell Johnson may quit T20s for Test cricket

Mitchell Johnson may quit T20s for Test cricket

Australia's Mitchell Johnson may quit limited-overs cricket to prolong his test career with an eye on the 2015 Ashes series in England, the fast bowler… More »

There's a lot going on: Fleming

There's a lot going on: Fleming

He experienced anxious moments in the lead-up to the tournament as the courts decided on whether to suspend the franchise, he said, but stressed that the… More »

Latif couldn’t work with tainted players

Latif couldn’t work with tainted players

Former Pakistan cricket captain Rashid Latif said Tuesday he turned down the job of national chief selector because he could not work with ex-players tainted… More »

We are not over-confident: Bailey

We are not over-confident: Bailey

Indian Premier League — George Bailey-led Kings XI Punjab will face Chennai Super Kings on Friday. More »

Taxing issue — BCCI hits roadblock

Taxing issue — BCCI hits roadblock

MoU between BCCI & its units to avoid double taxation delayed after a few decline to share details. More »

Big runs expected, with bat and ball

Big runs expected, with bat and ball

Royal Challengers Bangalore: Their main concern, once again, is the fast bowling More »

Black Caps pick rookie duo for West Indies

Black Caps pick rookie duo for West Indies

New Zealand selectors included two new caps in a 15-man Test squad named Tuesday to tour the West Indies, with injury-hit spinner Dan Vettori's future… More »

The stage is set for IPL-7 to start

The stage is set for IPL-7 to start

The Preview — Defending champions Mumbai Indians take on Kolkata Knight Riders More »

Srinivasan appeals to court to allow BCCI comeback

Srinivasan appeals to court to allow BCCI comeback

He was aggrieved by the allegations against him during the hearing. More »

Klinger on his exit from South Australia

Klinger on his exit from South Australia

Michael Klinger has revealed he felt compelled to leave South Australia after being told he would be only a fringe part of the Redbacks' plans for next season, and disputed the suggestion that he left… More »

India: cricket's Brazil

India: cricket's Brazil

They are tough to beat with a big talent base exposed to good facilities. (CYCSPL) More »

Delhi Daredevils say no to gifts

Delhi Daredevils say no to gifts

Franchises are doing their bit to refurbish the image of the tainted league. More »

India-Pakistan Test series likely in 2015

India-Pakistan Test series likely in 2015

The revival of Indo-Pak Test ties could take place in UAE. More »

Kohli hopes to end RCB trophy drought

Kohli hopes to end RCB trophy drought

'This time around we will hope to go few more steps ahead and actually get that trophy' More »

Gavaskar can help IPL regain glory

Gavaskar can help IPL regain glory

Apart from the foreign players a lot of behind-the-scene activity has taken place in selecting the Indian domestic players. More »

Tendulkar, Ganguly to promote soccer

Tendulkar, Ganguly to promote soccer

Leading Spanish club Atletico Madrid and former cricketers Sachin Tendulkar and Sourav Ganguly are among the owners of eight franchises of a new Indian… More »

This isn’t my first trip to India: Neesham

This isn’t my first trip to India: Neesham

Kiwi all-rounder wants to utilise the India leg to explore the country’s tourist attractions. More »

Ishant wanted to quit ODIs

Ishant wanted to quit ODIs

Says his mother made him change his mind. More »