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Home and Auto Loans to get Dearer – RBI Hikes Interest Rates to Tame Inflation!

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Winding the coil and unwind it! – thats what RBI seems to have done better than most other Central banks world over since the start of the global recession. In fact, RBI has gone one step further and announced that it will come out with more frequent mid-quarterly monetary reviews, on the lines of the major central banks abroad, for swifter monetary actions in sync with changing economic conditions.

In its first quarterly review of the monetary policy, RBI today increased both the short-term lending to 5.75% and borrowing rates to 4.50% from the immediate effect. However, the apex bank has kept the Cash Reserve Ratio unchanged at 6% on account of tightness of liquidity in the system.image

Get set for costlier loan EMIs – Yes, even your home and auto loans are likely to get dearer with an up-tick in the bank’s borrowing costs. The rate-sensitive industries such as Automobiles and Real-estate are likely to take a marginal hit on account of costlier lending activities.

At the same time, the RBI’s move to up short-term rates may also hinder industrial growth – particularly the manufacturing sector – as interest rates move northwards. The RBI has also revised growth forecast at 8.5% for 2010-11.

The RBI has raised its key policy rates for the fourth time this year, in its effort to unwind the stimulus measures offered during the global slowdown, by relaxing the interest rate burden and providing boost to the consumption in the economy. This forceful hike also comes on the back of stubbornly-held double-digit inflation (10.55% in June).

The RBI has hiked the repo rate – the rate at which banks borrow from the RBI – by 25 basis points. However, an up-tick of 50 basis points in the reverse repo rate – the rate at which banks lend to the RBI – has been above analyst’s expectations who had expected a 25 basis point increase in this key policy rate.

The central bank has raised its projection for the headline inflation for March end to 6% from 5.5% as forecasted earlier. With robust rebound in the real economy, the RBI has felt the need to sync the policy rates with the current market conditions and ensure price stability necessary to support this much-needed high growth.

With as many as four hikes in this year, aimed at taming inflation, the fears about bank funds getting costlier could well trickle down into the real economy in the form of costlier as well as reduced lending opportunities to the industry.

Will the RBI’s move hurt the economic recovery which is still at its nascent stage?

  1. […] With all the hoopla surrounding rate hike, what concerns me is whether the surge in interest costs will succeed in curbing the inflationary impact most of which is driven by supply constraints? If not, it will simply make it unbearable for the aam-aadmi to pay off their rising EMIs for home and car loans. […]

  2. Viral says

    Mr Krishna… Interesting take this. Your view provokes a need for second thought that apart from Senior citizens, even some less fortunate category of people deserve an extra mile of government aid.

  3. ch.t.v.n.krishna says

    sir,

    Why interest rates of deposits not giving to physically handicapped persons/widowers/divorced womens at par with senior citizens?

  4. Financial plannign says

    Aggressive increase in reverse repo rate by 50 basis points, is a measure taken by RBI to suck the excess liquidity, thereby curb demand side inflation. However, in our opinion core inflation will continue to exist.

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