Belying expectations of a rate cut, which his predecessor D Subbarao had steadfastly refused to carry out, RBI Governor Raghuram Rajan on Friday surprised markets in his maiden monetary policy review by hiking the repo rate by 25 basis points from 7.25 per cent to 7.5 per cent.
Most market forecasts had expected the former IMF chief economist to keep the rates on hold instead of curbing demand.
The increase in repo rate (the short-term lending rate at which banks borrow from the RBI) is expected to lead to higher consumer loan rates, especially affecting those going in for housing and car loans.
At a time when demand for homes and vehicles has been hit and consumers are likely to face higher equated monthly installments (EMIs), the automobile and real estate sectors were despondent at the RBI’s hawkish stance on lowering rates.
The RBI Governor, however, freed market liquidity through a reduction in the marginal standing facility (MSF) for banks borrowing from the RBI by 0.75 per cent to 9.5 per cent and a lowering of the minimum daily maintenance of the cash reserve ratio (CRR) to 95 per cent from 99 per cent.
The CRR (amount of funds that banks have to keep with the RBI) was kept unchanged at 4 per cent. Analysts feared that overall borrowing costs of the banks could now go up with the repo rate hikes. However, they also felt that the repo rate hike clearly signals the RBI’s strengthened focus on tackling inflation and reducing the fiscal deficit.
Rajan’s move to raise long-end rates, while relaxing the short-end surprised the market enough to drop over 590 points before closing down 383 points on Friday.
However, Rajan sought to allay apprehensions, saying: “We have to be very careful about immediately associating our repo rate hike to growth implications. Sometimes, the knowledge that inflation will be lower can actually enhance growth prospects rather than reduce growth prospects."
Friday’s was the first repo rate hike in nearly two years, aimed at easing inflation and “supportive of growth,” as Rajan put it.
Most bankers Deccan Herald spoke to said it is too premature to talk about any rate hike for now, but maintained that any call on this would be taken by their boards after September 30.
Auto, home loans get dearer
Friday’s policy rate tightening is likely to make a mess of the automobile industry’s festive season sales. The Society of India Automobile Manufacturers (SIAM) on Friday said the industry’s expectations from the monetary policy review have been dampened with the rise in interest rates.
"The industry had been hoping for a recovery through the ensuing festive season, anticipating an improvement in markets. But this move comes as a dampener to all these expectations," SIAM said in a statement.
General Motors India Vice-President P Balendran said the rate hike is not on expected lines and it is a major jolt for the automotive industry ahead of the festival season.
"We were expecting marginal growth in sales during the festival season due to a good monsoon but now even that looks challenging," he said. Real estate majors DLF and Parsvnath Developers said the increase in lending rates would affect growth prospects for the sector going ahead.
Real estate developer apex body CREDAI's Chairman Lalit Kumar Jain said: "It is equally important for the RBI to promote economic growth by encouraging real estate and infrastructure development even as the new Governor has inflation on his mind."
Anshuman Magazine, Chairman and MD of real estate consultancy CBRE South Asia, noted that the government must intervene to address supply side constraints which have stoked inflationary trends in the long term.
“A policy structure which relies entirely upon influencing demand side trends by hiking interest rates could result in long-term stagnation in investments in the economy,” Magazine said.
"High interest rate has been identified as a major barrier to boosting growth. The increase in the repo rate has come as a surprise to us. While industry is disappointed, reduction of interest rates charged and availability of credit remain a plea and we are confident RBI will keep this in its sights going forward," Ficci president Naina Lal Kidwai said.
CII Director-General Chandrajit Banerjee said the repo rate increase could have been avoided as industry is reeling under pressures of high cost of capital and low availability in a tight liquidity situation.
No role reversal: RBI mid-quarter monetary policy Review
- Key short-term lending rate (repo rate) hiked by 0.25%, and now stands at 7.5%
- Borrowing rate for banks cut under MSF by 0.75% to 9.5%
- Cash Reserve Ratio (CRR) for banks retained at 4%
- Minimum daily liquidity maintenance of CRR eased to 95% from 99%
- Inflation worrisome, no room for complacency
- Maiden policy announcement by Raghuram Rajan after taking over as RBI governor
- Economic growth well below potential
- WPI inflation will be higher than the projection for the rest of the year
- Pace of infrastructure project completion subdued; muted start to new projects