Home, auto loans to become costlier as RBI hikes key rates

Home, auto loans to become costlier as RBI hikes key rates

Home, auto loans to become costlier as RBI hikes key rates

The RBI has raised the short-term lending (repo) rate by 25 basis points to 7.50 per cent and the short-term borrowing (reverse repo) rate will move up by a similar margin to 6.5 per cent. It kept other rates and ratios unchanged.

The mid-quarterly policy initiatives, the RBI said, are expected to contain inflation, which is currently over 9 per cent, much above the comfort level of the central bank.

"The RBI has sought to maintain an interest rate environment that moderates inflation and checks inflationary expectations," the Finance Ministry said in a statement, adding that this was on expected lines.

"We need to have price stability for sustaining growth in the medium term," it added.
Bankers said the move would put pressure on interest rates and may make loans costlier subsequently.

"It (RBI's move) will put pressure on short-term deposit rates and subsequently on the lending rates. But rate hike by banks would not be immediate," Indian Overseas Bank CMD M Narendra told PTI.

While announcing the measures, the RBI said that tightening of the monetary policy would impact economic growth, which is already under pressure, in the short term.

With the rise in the repo rate, the interest rate for the additional lending facility of the RBI under the marginal standing facility (MSF) has gone up by 25 basis points to 8.5 per cent. This facility was introduced in the annual policy that was unveiled on May 3.

The monetary policy stance, the RBI said, "remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control."

The economic growth rate in the fourth quarter of the last financial year decelerated to 7.8 per cent from 9.4 per cent in the same period a year ago, raising fears of a slowdown.

Also, industrial production during April, 2011, moderated to 6.3 per cent from over 13 per cent in the same month last year. The moderation in growth has not deterred the Reserve Bank into taking a pause on its rate hike strategy, as the "challenge of containing inflation and anchoring inflation expectations persists".

"Thus, while the Reserve Bank needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movement in inflation with recent global developments and their key impact on the domestic growth trajectory," the RBI said.

Pointing out that the inflation is at an uncomfortable level, the RBI said the present wholesale price figures "understate the pressure because (domestic) fuel prices have yet to reflect the global crude oil prices."

The Reserve Bank's monetary tightening, industry chamber Assocham said, would further slow down fresh investment and restrict industrial growth.

"High input prices, rising finance costs and global uncertainties are adding to negative sentiments... and a high interest rate environment will most certainly put brakes on new investments," Assocham President Dilip Modi said.

The Reserve Bank, however, said that though signs of moderation are visible in some sectors, "broad indicators of activity... fourth quarter profit growth (of 2010-11) and margins and credit growth do not suggest a sharp or broad-based deceleration.

"Overall, even as there is deceleration in some important sectors, notably interest-sensitive ones such as automobiles, there is no evidence of any sharp or broad-based slowdown," it added.

The RBI further said that the progress of the 2011 South-West monsoon has so far been satisfactory and augurs well for agricultural production. Justifying its tough monetary stance, the RBI pointed out that the price of non-food manufactured items has emerged as an area of concern.

Non-food manufactured products inflation was 8.5 per cent in March, 2011, up from 6.3 per cent in April.

"... It (price rise of non-food manufactured products) is a matter of particular concern. Besides reflecting high commodity prices, it also suggests more generalised inflationary pressures; rising wages and costs of service inputs are apparently being passed on by producers along the entire supply chain," it added.

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