New Delhi: Reserve Bank governor Raghuram Rajan hiked the key repo rate by 0.25 per cent in an unexpected move on Friday. The repo rate is the rate at which banks borrow short term money from the Reserve Bank. The repo rate has been hiked to 7.5 per cent, while the cash reserve ratio or the amount of money banks have to park with the RBI, has been kept unchanged at 4 per cent.
The BSE Sensex plunged around 600 points on RBI’s surprise move, while the Indian rupee also dropped sharply to 62.61 per dollar. Banking stocks bore the brunt of the RBI’s shock move and the Bank Nifty slumped over 5 per cent. The central’s bank move to hike rates was aimed to rein in rising inflation. India’s retail inflation is around the double-digit mark and headline inflation hit a 6-month high in August.”Hiking the repo rate was unexpected. The governor is clearly worried about inflation. He is saying the improved international conditions will take care of the current account deficit funding and his focus will shift to fiscal deficit and inflation, which were taking a backseat,” Anjali Verma of Phillip Capital told Reuters.
RBI’s rate hike will surely disappoint the banking industry and millions of consumers who are struggling under the burden of high Equated Monthly Installments (EMIs). It would also dampen sentiments ahead of the peak festival season, when banks expect demand for loans to go up.
V Vaidyanathan of Capital First told NDTV that banks might hike lending rates by 10-15 basis points post the RBI decision. The only solace for India Inc. was the partial easing of liquidity measures announced in July. Dr Rajan decreased the marginal standing facility (MSF) by 0.75 per cent to 9.5 per cent. The central bank jacked it up by 200 basis points in July to 10.25 per cent so that it stood 300 basis points above the official policy repo rate, aiming to tighten market liquidity and make it more expensive to speculate against the rupee. The RBI also reversed some of the other rupee-supporting steps. He relaxed a requirement that banks meet 99 per cent of their CRR on a daily basis. Banks will now have to meet 95 per cent of their CRR on a daily basis
Bureau Report
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