M A I N   N E W S

RBI ups interest rates, lending costs may rise
Sanjeev Sharma
Tribune News Service

New Delhi, January 28
The cost of borrowing for consumers and corporates may go up as the RBI surprised today with a 25 basis points increase in key interest rates unleashing, in the process, a sharply focused battle against high consumer inflation which has been corroding household budgets.

This was an 8 for 8 policy as the RBI increased the short-term lending (repo) rate to 8 per cent from 7.75 per cent and set a path for achieving a 8 per cent consumer inflation target by January next year.

In a major shift in stance, RBI Governor Raghuram Rajan set consumer inflation as the data point to watch and squarely targeted inflation as the major objective of monetary policy. Rajan had given some hints on the approach and possible rate hikes at a lecture in Delhi last week.

Rajan said an increase in the policy (repo) rate by 25 basis points was needed to set the economy securely on the recommended disinflationary path.

The RBI Governor made a pitch for monetary policy to attack inflation as it hurts households and the poor. “Elevated levels of inflation erode household budgets and constrict the purchasing power of consumers. This, in turn, discourages investment and weakens growth.

High inflation weakens the rupee. Inflation is also a tax that is grossly inequitable, falling hardest on the very poor”, he said.

He also called the so-called trade-off between inflation and growth as false. “It is only by bringing down inflation to a low and stable level that monetary policy can contribute to reviving consumption and investment in a sustainable way. The so-called trade-off between inflation and growth is a false trade-off in the long run”, Rajan said.

The rate hike today means that equated monthly instalments (EMIs) on loans may go up. However, for the moment, banks are weighing the pros and cons of increasing interest rates as it would have a negative impact on the already heavy distressed assets. Any increase in rates will be good news for savers as fixed deposit rates would go up.

The central bank lowered its growth forecast for the current financial year to less than 5 per cent from 5.5 per cent and said inflation would continue to hover around 8 per cent in the next fiscal.

Industry, which has been pressing for a lower interest rate regime, was clearly disappointed as growth is already very sluggish and demand is slackening. Rate hikes affect the real estate sector in a big way as it is an interest-rate sensitive sector and the move will hit property sales, particularly in the residential segment.

0.25 per cent hike

* The RBI increased the short-term lending (repo) rate to 8 per cent from 7.75 per cent

* RBI Guv says an increase in the policy rate is needed to set the economy on the disinflationary path

* The increase in interest rate means that equated monthly instalments (EMIs) on loans may go up

* Any increase in rates will be good news for savers as fixed deposit rates will go up

Industry disappointed

* Industry, which has been pressing for a lower interest rate regime, was clearly disappointed

* It says the growth is already sluggish and demand is slackening

* Rate hikes affect the real estate sector in a big way as it is an interest rate sensitive sector

* The move will hit property sales, particularly in the residential segment