In an unexpected move, the Reserve Bank of India (RBI) Tuesday hiked key policy interest rates by 0.25 percent to tame inflation, a move that is likely to make home, automobile and other loans costlier and delay economic growth recovery.
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.
Addressing a media conference after the release policy review, RBI Governor Raghuram G. Rajan said the central bank’s action on rate hike should not be seen as anti growth.
“We need to bring inflation down. The best way for us to sustain growth over a medium term is to bring inflation down,” he said.
The RBI governor said the central bank is “fostering growth through steady reforms”.
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.
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.
Reacting to the RBI action, chairperson of the country’s largest lender State Bank of India Arundhati Bhattacharya said deposit rates would go up. However, she did not specify the expected increase in rates.
Chairman of Prime Minister’s Economic Advisory Council C. Rangarajan expressed hope that the central bank would not further tighten the monetary policy.
“I think this could be the last in the series of rate hikes,” Rangarajan said.
“At the same time, the policy indicates that if inflation moves as expected, further tightening would not be required in the near term and any easing of inflation beyond the current projection may allow for more accommodative monetary policy,” said Chanda Kochhar, managing director and chief executive officer of ICICI Bank.
“Going forward, we will have to watch the trends in inflation, growth, credit demand and cost of deposits for banks,” Kochhar said.