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India’s central bank raised the repo rate by 25 basis points from 7.25 percent to 7.5 percent with immediate effect. As per the structural changes announced in the monetary policy for 2011-12, the reverse repo rate stands automatically revised to 6.5 percent.
This is the tenth time the RBI has raised interest rates since March 2010.
“Domestic inflation remains high and much above the comfort zone of the Reserve Bank,” said the RBI in the mid-quarter monetary policy review.
“While the Reserve Bank needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory,” the RBI added.
Latest data showed that annual inflation rose to 9.06 percent in May, compared to 8.66 percent in the month before. Food inflation too is hovering around a high 8.96 percent as recorded for the week ending June 4.
Although on expected lines, industry hoped this would be the last of the rate hikes, reasoning that successive monetary tightening measures had not helped in curtailing inflation.
“CII hopes this is the last increase in rates amidst growing signs of slowdown in economic and investment activities. Current spell of inflation, being largely associated with supply-side bottlenecks and imported commodities cannot be addressed by monetary tightening alone,” said Chandrajit Banerjee, director general, CII.
The Reserve Bank, however, said that the current increase in repo rate would help “contain inflation and anchor inflationary expectations by reining in demand side pressures and mitigate the risk to growth from potentially adverse global developments.”
Other policy rates such as the statutory liquidity ratio and the cash reserve ratio — the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities — have been left untouched.
The bank rate also remains unchanged at 6 percent.
Leading real estate firm Raheja Developers said the rate hike would lead to an increase in their operation costs.
“As the cost of money goes up, the cost of construction and production will also go up. This will lead to further inflationary pressures,” said Navin M. Raheja, chairman of Raheja Developers Limited who also heads Assocham’s real estate committee.
Auto manufacturers, already hit by sluggish sales, will also feel the pinch of the interest rate hike as banks will look to pass on higher interest rates to consumers.
“If the cost of borrowing goes up, it will have an impact on the expansion plans of auto companies and their sales. It can have a ripple effect on auto component manufactuers as well,” said Yezdi Nagporewalla, executive director with KPMG.
The RBI, however, said that it would continue to persist with rate hikes in the coming months.
“Based on the current and evolving growth and inflation scenario, the Reserve Bank will need to persist with its anti-inflationary stance of monetary policy,” the bank said.
It also maintained the projection for gross domestic product growth for 2011-12 at around 8 percent.
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