Auto, home and corporate loans are set to get dearer as the Reserve bank of India raised the repo and reverse repo rates by 25 bps on Friday in its mid-quarterly monetary policy review. This is 12th time since March 2010 when the central bank raises the key rates to control
rising inflation.
Following the increase, the short-term lending (repo) rate stands at 8.25 per cent and the short-term borrowing rate (reverse repo) is 7.25 per cent. The RBI, while announcing its mid-term review of the monetary policy, kept all other rates and ratios unchanged.
"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," the central bank said.
RBI has raised interest rates 11 times since March 2010 to check the rate of price rise, but inflation has remained much above the central bank's comfort level of 5-6 per cent.
Headline inflation inched closer to the double-digit mark in August, rising to 9.78 per cent on the back of soaring prices of food and manufactured products, which raised a doubt in Reserve Bank of India's move to continue with its tight monetary policy is having any effect on Inflation.
Read how you can deal with rising interest rates and still get that loan "As such, 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," the RBI said in its mid-quarter review of the monetary policy.
Going forward, the RBI's stance will be influenced by signs of downward movement in the inflation trajectory, to which a moderation in demand is expected to contribute, besides the implications of global developments, it said.
"The step is consistent with the RBI monetary stance for the first half of 2011-12 and overall concerns on growth sustainability in the medium term.
"I am hopeful that measures taken would get us back a more comfortable inflation situation earlier rather than later, while having scope for growth to pick up in the second half of the year," Finance Minister Pranab Mukherjee said.
Commenting on the rate hike, Indian Overseas Bank Chairman and Managing Director M Narendra said banks need to pass on the hike to customers as the cost of funds has gone up.
"I believe banks would wait till the month-end before taking a call on an interest rate hike," he said.
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