RBI increases repo rate by 50 bps, Home and Auto loans become costlier

In a bid to check inflation, Reserve Bank today raised its short term lending (repo) rate by 50 basis points to 7.25 per cent, while lowering the economic growth projection to 8 per cent for the current fiscal.

The RBI has also increased the saving bank rate by 50 basis points to 4 per cent to give higher returns to depositors in the wake of high inflation.

RBI Governor Dr D Subbarao announced these measures as part of annual credit policy to contain inflation, which is hovering around 9 per cent, and sustain economic growth in the medium-term.

RBI has pegged GDP growth rate for the current fiscal at 8 per cent against the government's projection of 9 per cent. The economy grew by 8.6 per cent in 2010-11.

The reverse repo, the rate at which bank park funds with RBI, has been raised by 50 basis points to 6.25 per cent.

Factoring in the many headwinds such as the very uncomfortable inflation, which stood at 8.98 in March and the rising crude and commodity prices, the Governor pegged down GDP growth by over 1 per cent between 7.4 and 8.5 percent for the current fiscal.

"High oil and other commodity prices and the impact of the Reserve Bank's anti-inflationary monetary stance will moderate growth," Dr Subbarao said.

"Based on the assumption of a normal monsoon, and crude oil prices averaging $ 110 a barrel over the full year 2011-12, our baseline projection of real GDP growth for 2011-12, for policy purposes is around 8 per cent," he added.

Making a highly ambitious inflation management objective, the policy aims at bringing down inflation to 4 to 4.5 percent for the full fiscal, with a medium term objective of 3 percent.

The Governor, however, said, "RBI's baseline inflation projections are that inflation will remain elevated, close to the March, 11 level (8.98 percent) over the first half of FY12 before declining".

To contain volatility in the overnight inter-bank rates, RBI has decided to open a new borrowing facility for banks under the marginal standing facility (MSF) to be effective May 7. The rate of interest on this facility will be 100 bps above the repo. The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility.

As per the above norms, the difference between the reverse repo and MSF will be 200 basis points. While the repo rate will be in the middle, the reverse repo rate will be 100 basis points below it, and the MSF rate 100 bps above it,the Governor said, adding the MSF rate gets calibrated at 8.25 percent.

On the expected policy outcome, the Governor said, the policy actions are aimed at "first containing inflation by reining the demand side pressures, anchoring inflation expectations and sustaining growth in the medium term by containing inflation...going forward, the RBI will continue with its anti-inflationary stance".

The RBI will conduct the first quarter review on July 26.

Home, auto loans to become costlier

Home, auto and other loans are set to become costlier with the Reserve Bank today hiking key short-term rates to contain inflation, while giving relief to small savers by increasing the savings bank rate to 4% from 3.5% now.

The signal was given by the RBI in its annual policy review meeting for FY12, where it hiked the repo rate (the rate at which banks borrow from the RBI) by 50 basis points to 7.25%, the ninth increase since March, 2010.

RBI Governor D Subbarao made it clear that containing inflation would take precedence over growth, which has been pegged at a lower level of 8% for FY12 as against the government's projection of 9%.
The move to hike the rates has been necessitated as the RBI feels inflation would remain at an "elevated level" of 9% in the first half of the current financial year before moderating to 6% by March, 2012.

Subbarao's hawkish stance was supported by Finance Minister Pranab Mukherjee, who said, "This (hike in rates) was necessary to contain inflation. Inflationary pressure in the economy is still very high."

Planning Commission Deputy Chairman Montek Singh Ahluwalia also endorsed the RBI stance and welcomed the hike in both the lending rate as well as the savings rate.

"Personally, I am very glad that the RBI has given a clear signal going beyond the usual 25 basis points (revision)," he added.

The RBI Chief said over the long run, high inflation is inimical to growth, as it harms investment by creating uncertainty.

"Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short run, should take precedence," he added.

Most bankers felt there was no option but to increase interest rates as the cost of borrowing funds has also gone up, with the RBI hiking the short-term lending rates.

However, the industry is disappointed. "This is certainly a very hawkish monetary stand, which would make the investment environment even more difficult... We are afraid that with growth slowing down, employment targets will not be achieved and this could generate greater social pressures," Ficci Director General Rajiv Kumar said.

The RBI, however, kept the Cash Reserve Ratio (the portion of cash banks are required to keep with the RBI) at 6 per cent, ensuring sufficient liquidity in the system.

The central bank also introduced a new mechanism, Marginal Standing Facility, under which banks would be permitted to borrow short-term funds (overnight) up to 1% of their deposits at 8.25%.