The Reserve Bank of India (RBI) Tuesday hiked key policy interest rates by 0.25 percent to tame inflation. The move could make home, automobile and other loans costlier and further dampen industrial growth.
The repo rate that banks pay when they borrow money from the RBI to meet their short-term fund requirements, was increased to 8 percent from 7.75 percent per annum.
The reverse repo rate that the RBI pays to commercial banks when they park their surplus short-term funds with the central bank, has been adjusted to 7 percent.
In its third quarter review of the monetary policy, the RBI also hiked the marginal standing facility rate by 0.25 percent to 9 percent. However, the cash reserve ratio (CRR) has been kept unchanged at 4 percent.
These rates determine the lending and borrowing norms of commercial banks, thus affecting the equated monthly installments (EMIs) on home, automobile and other loans.
The move came as a surprise as most analysts had predicted a status quo, given the recent softening of inflation.
The wholesale price-based inflation declined to a five-month low of 6.16 percent in December. It was at a 14-month high of 7.52 percent in November.
There was a similar decline in retail inflation. The Consumer Price Index (CPI) based inflation eased to 9.87 percent in December from 11.16 percent in the previous month, according to the latest official data.
In the policy review statement, RBI Governor Raghuram G. Rajan said that despite the recent softening, inflation has been high and the policy action was aimed to set the economy on a “disinflationary path”.
However, Rajan said a near term tightening in the monetary policy is not expected.
“If the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture,” he said.
“In fact, if inflation eases at a pace that is faster than we currently anticipate, and that reduction is expected to be sustained, the Reserve Bank will have room to become more accommodative,” the governor added.
India Inc. and a section of the government have been clamouring for rate cuts to revive economic growth, which is lingering at a decade’s low.
India’s gross domestic product (GDP) growth slumped to 4.6 percent in the first half of the current financial year, the worst performance in over a decade. Factory output, measured in terms of the Index of Industrial Production (IIP) dropped by 2.1 percent in November.
Rajan said the central bank is also concerned about economic growth and is “fostering growth through steady reforms.”
“The slowdown in the economy is getting increasingly worrisome. Our current assessment is that growth is likely to lose momentum in Q3 of 2013-14, with industrial activity in contractionary mode, mainly on account of manufacturing,” he said.
“Lead indicators of services also suggest a subdued outlook, barring some pick-up in transport and communication activity. On the other hand, agricultural performance has so far been robust, and the strong pick-up in rabi sowing indicates that this should be sustained,” the governor added.