RBI hikes repo rate by 25 bps

The Reserve Bank of India (RBI) on Wednesday evening has announced to hike the repo rate, the rate at which the banks borrow from RBI, by 0.25 percent from 7.75% to 8% with immediate effect.

This act of RBI would lead the banks to hike the interest rate in short term debts as the apex bank would now charge more from the banks for disbursing the loans, and banks would definitely pass it to the clients.

According to the experts, “This step of RBI will come to tame the rising inflation.” However, this act will not show immediate impact but in long term, it would bind the rupee depreciation but also affect the bond yield badly.

“On a review of the current macro-economic and overall monetary conditions and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis,” stated RBI in the released statement.

Referring to Annual Policy Statement for this fiscal year, RBI said, “Monetary policy has to respond proactively to immediate concerns; it cannot afford to ignore considerations over a relatively longer term perspective of, say, one to two years, with respect to overall macroeconomic prospects.”

The Central Bank has observed the skyrocketing inflation since last four-five months, which was 4.36 per cent on January 12, 2008, when RBI announced the Third Quarter Review for 2007-08, has now crossed the 8% level in last Wholesale Price Index (WPI).

The WPI reported inflation at 8.24% for the week ended on May 24, 2008, while Commodity Price Index (CPI) has increased from 4.8 to 5.9 per cent in January to a range of 7.8 to 8.9 per cent in April 2008.

Reviewing the critical economic condition of the country, RBI has taken steps of raising Liquidity Adjustment Facility (LAF) by 25 basis points while it has not touched the reverse repo rate, the rate, which banks earn on excess funds parked with the central bank against Government securities.

Most of the banks are waiting for the next step of RBI as the Bank is near for its first quarter review of this fiscal in this month.

This step of RBI may affect the price of all types of short-term loans and discourage the banks to disburse it. The silver lining of this decision is that it could soften the property price.

Since January 2006, RBI has raised the repo rate or LAF six times. Besides this, RBI has also increased the limit of support level for oil companies to Rs.1,500-crore per day.