RBI raises policy rates, loans may get costlier

The Reserve Bank of India raised its main lending rate by 0.25 percentage point on Thursday and its borrowing rate by a larger-than-expected 0.50 percentage point, as it continues with the monetary tightening measures to cool inflation.

These hikes would be effective with immediate effect. Bankers said that there is possibility of a hike in lending rates and deposit rates.

An NDTV poll suggested that the RBI could increase repo and reverse repo rates by 25 basis points.

The Reserve Bank of India's repurchase rate (repo), or its overnight lending rate, now stands at 6 per cent, while the reverse repurchase rate, or borrowing rate, is at 5 per cent.

This is the first mid-quarter review of the central bank since it announced in July that the rate-setting meeting would be held at six-week intervals, instead of every quarter. This will help the Reserve Bank of India avoid making surprise moves between meetings.

Recent inflation and indusial growth numbers suggested that the central bank may continue with its monetary tightening measures. The strong economic growth has also given the central bank some headroom for tightening rates.

Despite a slight easing trend in inflation, it still remained at uncomfortable levels. The headline inflation for August remained elevated at 9.5 per cent, according to the old index.

Food prices, the main driver of Indian inflation, have again shown an upward trend after a brief period of moderation in July and first half of August. Food inflation accelerated to above 15 per cent in the first week of September. And food prices are not expected to ease significantly until the summer-sown crops boost supplies.

Industrial output growth for July was at a better-than-expected 13.8 per cent, making a case for further monetary tightening. India's GDP grew by 8.8 per cent in the first quarter, against 6 per cent in the April-June period last fiscal.

Finance Minister Pranab Mukherjee, commenting on the August inflation numbers, said, "There is no room for complacency... we must continue to be vigilant and be prepared with the instruments of fiscal and monetary policy to use them as and when the need arises."