The Reserve Bank of India has raised its short-term lending and borrowing rates with immediate effect during the mid-quarterly review of the monetary policy. While the repo or lending rate was hiked by 25 basis points to 6%, the reverse repo or borrowing rate was increased by 50 basis points to 5%. This is the fifth instance of rate hike by the central bank this year.
“I think it (the rate hike) is in the right direction because now the corridor has been narrowed down and still inflationary pressure is there in the system,” Finance Minister Pranab Mukherjee told media persons in New Delhi today. “I think the adjustment of repo and reverse repo will help to mop up additional liquidity, which is putting pressure on the system,” he added.
Montek Singh Ahluwalia, deputy chairman of the Planning Commission said that the rate hike will not impact foreign portfolio inflows into the country.
The latest rate hike is expected to result in an increase in cost of funds for banks. This will ultimately make loans more expensive, thereby reducing consumption. Chief economic advisor Kaushik Basu said that the banks may increase deposit rates, but the liquidity adjustment facility (LAF) corridor signals them to lower the gap between loans and deposit rates. He added that the RBI move is not to dampen growth prospects and future hikes cannot be ruled out.
The RBI move is specifically meant to tame inflation, though the inflation has displayed a tendency to mellow. The central bank has pointed out that inflation has reached a plateau, but is likely to remain at unacceptably high levels for some more months. While the overall inflation came down in the last two months, food inflation is climbing up once again.
The RBI move aided in ending the stock market’s dream run this week. Sensex closed 0.43% lower at 19,417.


