News: RBI hike repo and reverse repo rate by 0.5% to tame inflation

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RBI hike repo and reverse repo rate by 0.5% to tame inflation

In its quarterly review of the monetary policy, the Reserve Bank of India (RBI)continued to persevere with the anti-inflationary stance. In a move which took the economists and bankers by surprise, the central banker hiked its key policy rates, repo rate and reverse repo rate, by 50 basis points (100 basis points is equal to a percent). The repo rate, the rate at which the RBI injects liquidity in the banking system, has been increased from 7.5% to 8% and the reverse repo rate, the interest that banks earn on surplus liquidity parked with the RBI, increased to 7%. As a matter of fact since March 2010, the RBI has tightened policy rates on 11 occasions (including the latest hike). According to Abheek Barua, Chief Economist, HDFC Bank, “The 50 bps hike suggests that the RBI’s assessment of inflation is far more dire (it revised its year-end inflation forecast up from 6 to 7%) than the market and its tolerance much less.” In view of the moderation in economic activity, bankers and economists were expecting a 25 basis points hike in repo rates. “The unexpected hike in the repo rate by 50 bps is indicative that RBI has taken a hawkish stance vis-a vis the inflation outlook,” said Sandesh Kirkire, CEO, Kotak Mutual Fund.

In its quarterly review of the monetary policy, the Reserve Bank of India (RBI)continued to persevere with the anti-inflationary stance. In a move which took the economists and bankers by surprise, the central banker hiked its key policy rates, repo rate and reverse repo rate, by 50 basis points (100 basis points is equal to a percent). The repo rate, the rate at which the RBI injects liquidity in the banking system, has been increased from 7.5% to 8% and the reverse repo rate, the interest that banks earn on surplus liquidity parked with the RBI, increased to 7%. As a matter of fact since March 2010, the RBI has tightened policy rates on 11 occasions (including the latest hike). According to Abheek Barua, Chief Economist, HDFC Bank, “The 50 bps hike suggests that the RBI’s assessment of inflation is far more dire (it revised its year-end inflation forecast up from 6 to 7%) than the market and its tolerance much less.” In view of the moderation in economic activity, bankers and economists were expecting a 25 basis points hike in repo rates. “The unexpected hike in the repo rate by 50 bps is indicative that RBI has taken a hawkish stance vis-a vis the inflation outlook,” said Sandesh Kirkire, CEO, Kotak Mutual Fund.
While the RBI has to weigh the balance between growth and inflation, for the common man the impact of the monetary policy is that all loans, including auto, home, personal and other corporate borrowings, are expected to cost more. As a matter of fact banks like HSBC, Union Bank of India and Dena Bank, have already increased their lending rates. On the flip side, it does spell good news for depositors as, along with the lending rates, the fixed deposit rates will also inch upwards.
High inflation would also imply that employers will face more pressures to increase salaries, thereby hurting their margin.
 

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Topics: C-Suite, #Updates

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