The Reserve Bank of India has hiked policy rates for the tenth consecutive time in a bid to contain rising inflation. The repo rate, at which the RBI provides credit to banks, has been hiked by 0.25 per cent to 7.50 per cent. The reverse repo rate, which is 1 per cent below the repo rate, now moves up to 6.50 per cent.
Reacting to the policy, former Governor of Reserve Bank C Rangarajan said, “The action was warranted by the circumstances. The May inflation went up contrary to expectations leaving RBI with no option but to raise rates.”
Retail lending rates are bound to follow the policy rates. That means consumers will have to pay a higher EMI on their home loans and auto and personal loans will cost more. In the last two years, interest on home loans has gone up by at least 2 per cent, from about 8 per cent to above 10 per cent.
MV Nair, CMD of Union Bank said, “In the last 4-5 quarters, banks have hiked lending rates by 200-225 bps but lending remains robust except agriculture. Considering this, we will have to pass on the policy rate hike to the Industry.”
The RBI's tough stance on monetary policy emerges from the fact that despite several rate hikes, inflation continues to be northbound. Inflation has risen despite a favorable base effect. Headline inflation in May went up to 9.06 per cent on the back of a rise in prices of manufactured products and petrol. The core inflation in May rose to 7.20 per cent and real interest rates continue to be negative.
Sajjid Chinoy, India Economist at JP Morgan said the central bank is definitely not at the end of the rate cycle and another 50-75 bps rise should be expected through the course of the year.
Reacting to the policy, former Governor of Reserve Bank C Rangarajan said, “The action was warranted by the circumstances. The May inflation went up contrary to expectations leaving RBI with no option but to raise rates.”
Retail lending rates are bound to follow the policy rates. That means consumers will have to pay a higher EMI on their home loans and auto and personal loans will cost more. In the last two years, interest on home loans has gone up by at least 2 per cent, from about 8 per cent to above 10 per cent.
MV Nair, CMD of Union Bank said, “In the last 4-5 quarters, banks have hiked lending rates by 200-225 bps but lending remains robust except agriculture. Considering this, we will have to pass on the policy rate hike to the Industry.”
The RBI's tough stance on monetary policy emerges from the fact that despite several rate hikes, inflation continues to be northbound. Inflation has risen despite a favorable base effect. Headline inflation in May went up to 9.06 per cent on the back of a rise in prices of manufactured products and petrol. The core inflation in May rose to 7.20 per cent and real interest rates continue to be negative.
Sajjid Chinoy, India Economist at JP Morgan said the central bank is definitely not at the end of the rate cycle and another 50-75 bps rise should be expected through the course of the year.
In its statement, the Reserve Bank said, "Domestically, inflation persists at uncomfortable levels. Moreover, the headline numbers understate the pressures because fuel prices have yet to reflect global crude oil prices...Going forward, notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high.
Against this backdrop, the monetary policy stance remains firmly anti-inflationary; recognizing that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control."
Against this backdrop, the monetary policy stance remains firmly anti-inflationary; recognizing that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control."
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