Mumbai, September 16: Loans might get dearer soon as the Reserve Bank of India hiked the repo rate by 25 bps to 6% and the reverse repo rate by 50% in the first quarterly review for the year 2010-11.
The RBI said that it in a bid to tame the surging inflation, it raised key policy rates by 25 basis points in its first-ever mid-quarterly policy review on Thursday.
As per the revised index, inflation stood at 8.51% in August, although it was 9.5% according to the old index.
Although the August figure is lower than that of July which was at 9.8%, there are still demand and supply pressures, which needs to be addressed by the central bank. Hence it is imperative to raise key interest rates, to control the money flow, say experts.
“I think RBI may go for hike in each of the two key policy rates, repo and reverse repo, by 25 basis points each as there was an upward bias towards the interest rates. I also see a possible hike in cash reserve ratio (CRR) by 25 basis points as there was ample liquidity available into the system,” said S Raman, chairman and managing director, Canara Bank.
His views were concurred by SA Bhat, chairman and managing director, Indian Overseas Bank, who also feels that there will be a hike in the key policy rates by 25 basis points each, in a bid to contain inflation. “However, I don’t think if the RBI will go for any hike in CRR,” he added.
On Tuesday, the government came out with a new wholesale price index series that measured inflation in August at 8.5% based on 2004-05 prices.
Subir Gokarn, deputy governor at RBI has says, “The inflation rates that the economy is now experiencing, both from the supply and the demand sides, are clearly a matter of great concern. It is incumbent on the government and the central bank to use all the means at their disposal to rein inflation.”
So far, since the beginning of 2010, the central bank has hiked policy rates by 1.25 % points.
In its first quarter monetary review in July, the central bank had raised short-term lending (repo rate) and borrowing rates (reverse rates) by 0.25% and 0.50%.
The repo rate now stands at 5.75%, while the reverse repo rate at 4.50%.
The country’s gross domestic product grew by 8.8% in the first quarter, against 6% in the April-June period last fiscal.
At the same time, industrial output expanded by 13.8% in July from 7.2% in the corresponding month last year.
-Agencies