After petrol prices, higher interest rates set to bite

Opting to address the problem of high inflation over slackening factory output and overall growth, the repurchase rate, or the interest the central bank levies on short-term borrowing by commercial banks, has been raised to 8.25 percent from 8 percent.
Automatically, the reverse repurchase rate, or interest on short-term lending, gets hiked to 7.25 percent from 7 percent, since the central bank felt inflation levels remain well above its comfort zone.

In a similar exercise last month, the two policy rates were hiked by 50 basis points.
The rate hikes were effected by Reserve Bank of India (RBI) Governor Duvvuri Subbarao during the mid-quarter review of the apex bank's monetary policy for this fiscal here Friday, amid high inflation rate that is nudging double-digit levels once again.

"The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Bank’s comfort zone," said the central bank.

"A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance."

Latest data showed annual inflation rate for August, based on the wholesale price index, inching closer towards double digits at 9.78 percent, while the country's food inflation still remained at elevated levels.

Commercial banks are now widely expected to pass on the interest rate burden to their customers that could made consumer and corporate loans dearer, even while raising the interest outgo on existing loans, along with a possible longer tenure for repayment.
Reacting to the monetary policy update, Finance Minister Pranab Mukherjee said the hike effected by the central bank was in tune with the stance it has taken in a bid to bring down prices and inflationary expectations.

"I am hopeful of a comfortable inflation situation sooner rather than later," Mukherjee said, and hoped overall economic growth -- which had retarded to 7.7 percent in the first quarter of this fiscal -- would pick up in the second hald of this fiscal.

The growth of India's gross domestic producty (GDP) had decelerated to 7.7 per cent in the first quarter of 2011-12 from 7.8 percent in the previous quarter and 8.8 percent in the corresponding quarter of the previous year.

The central bank also did not mince words in criticising the government for its fiscal management due mainly to decline in revenue receipts, pressures from unproductive expenditure and high subsidies on fuels and fertilisers.

"Fiscal deficit at 55.4 percent of the budget estimates in the first four months of the current fiscal was significantly higher than that of 42.5 percent during the corresponding period last year," the central bank said.

"Going forward, the stance will be influenced by signs of downward movement in inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments."