Repo Rate Once Again Hiked by RBI

26 October 2011 - Which Way to Pay

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Repo Rate Once Again Hiked by RBI

For the 13th consecutive time since January 2010, the Reserve Bank of India increased key interest rates yesterday by 25 basis points. The increase however is thought to be the last as the central bank acknowledged the rate hike’s affect on economic growth. This additional increase could lead banks to raise lending rates having not responded to the last rate increase in September, which would make home loans and auto loans more expensive. The probability of lending rates increasing significantly however is marginal as demand eases and deposit growth remains strong.

The Reserve Bank of India upped the repo rate to 8.5%, an increase of 25 basis points. This is the interest rate on money borrowed by banks from the central bank. By hiking the repo rate, the reverse repo rate is automatically increased by the same proportion of 25 basis points. The reverse repo rate is the interest rate that banks store extra funds with the Reserve Bank.

It all relies at this point on the inflation trajectory. If inflation projections are met then hikes in rates in December at the mid-quarter review are unlikely. The governor of the central bank, D Subbarao, has downgraded his GDP forecast from 8% to 7.6%. He kept the inflation target rate the same at 7%. The first bank to react to the increase was Yes Bank which hiked it lending rates. Bigger lenders like SBI and HDFC Bank are intending to make a decision on rates having analysed cost of funds more thoroughly.

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