RBI monetary policy review: Interest rate hiked 0.25 pct, Rajan makes consumer loans costlier

Oct 29 2013, 21:41 IST
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RBI monetary policy review: Raghuram Rajan's cbank expects economy to grow at 5 pct. AP RBI monetary policy review: Raghuram Rajan's cbank expects economy to grow at 5 pct. AP
SummaryIn RBI's monetary policy review, Raghuram Rajan dampens Diwali fest, hikes interest (repo) rate.

Keeping up an anti-inflationary stance, Reserve Bank of India Governor Raghuram Rajan Tuesday raised the repo rate, or the rate of interest at which banks borrow from it, by 25 basis points to 7.75 per cent.

In his second quarter review of the monetary policy for FY14, Rajan, however, cut the marginal standing facility rate for banks to 8.75 per cent. This is the additional window for banks to borrow from the RBI when they exhaust limits under the repo window.

The moves are meant to encourage banks to keep EMIs unchanged for purchases of cars, houses and even educational loans. The Rajan prescription keeps these high growth areas for banks solvent by providing for easy liquidity. But bankers indicated they are planning to raise rates.

SBI chief Arundhati Bhattacharya said she would expect some change in the interest rates soon.

Rajan also lowered his estimate for GDP growth at the end of the year to 5 per cent and raised that of projected wholesale price inflation to 6 per cent. The macroeconomic policy document issued by the RBI Monday had reasoned that while growth will revive only later in the year, there is a real danger of inflation, including that of food, peaking again.

Going forward, RBI will have to continue its staring contest with inflation. This implies signaling a hawkish stance...achieving lower and more stable level of inflation is critical to revive growth, HSBC chief economist for India and Asean, Leif Eskesen, wrote in a note.

Rajan, however, told the media that it would be wrong to assume that the next rate move will be upwards. The RBI has now raised interest rates twice in the past two months.

Naresh Takkar, MD & CEO, Icra, said the RBI had to guard against a generalization of inflationary pressures, since factors other than high interest rates, such as structural constraints, have also contributed to anaemic growth.

The RBI review made it clear the bank will leave growth concerns to the finance ministry for the time being as these hinge on removal of structural bottlenecks. The stock markets responded enthusiastically with the BSE Sensex and the Nifty gaining more than one percent.

The RBI Tuesday also closed the special borrowing window which had been opened for mutual funds in July this year. Rajan has now rolled back almost all the emergency measures announced earlier this year

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