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India's central bank raised interest rates on Friday for the 12th time in 18 months and said it will persist with its anti-inflationary policy stance, even as growth slows in Asia's third-largest economy.
The repo rate, or the interest the central bank levies on short-term borrowing by commercial banks, has been raised to 8.25 percent from 8 percent. Automatically, the reverse repo rate, or interest on short-term lending, gets hiked to 7.25 percent from 7 percent.
The central bank said it was too soon to ease back from its anti-inflationary bias, setting the stage for auto, housing and commercial loans to become dearer once again.
Commercial banks are widely expected to pass on the interest rate burden to customers, which could made consumer and corporate loans dearer, even while raising the interest outgo on existing loans, along with a longer tenure for repayment.
"A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said in a statement.
The RBI's hawkishness, which saw it raise rates by an unexpectedly steep 50 basis points in late July, increasingly jars with dovish talk from central bankers worried about the health of the global economy, with both the United States and euro zone weighed down by debt problems.
It also sets India apart from its Asian neighbours, which have recently rolled back rate hike campaigns.
Headline inflation for August rose to 9.78 percent, data on Wednesday showed, its highest level in more than a year.
India's economic growth has cooled and demand crimped following the cumulative impact of earlier rate increases and rising prices.
"RBI is still viewing rising inflationary expectation as a key risk after a series of 12 rate hikes. This, according to me,
is a real worry so far as rate outlook is concerned," said Nitesh Ranjan, chief economist at Union Bank in Mumbai.
The benchmark 10-year bond yield rose 4 basis points after the central bank kept up its hawkish tone, while the one-year swap rate surged 11 basis points. Shares too trimmed gains to be up just about 0.4 percent from 1.4 percent before the announcement.
While inflation in India was initially driven by food and fuel prices, both largely beyond the scope of monetary policy, it has spread to the core non-food manufacturing sector and remains far above the central bank's perceived comfort zone of 4 to 4.5 percent.
Most economists in a poll released on Monday expected the central bank to raise rates on Friday and then pause in a tightening cycle that has made RBI Gov. Duvvuri Subbarao one of the most aggressive central bankers anywhere over the past two years.
Industrial output in July was the weakest in nearly two years, while India's June-quarter economic growth of 7.7 percent was the slowest in six quarters.
The rupee, which plunged to a near two-year low against the U.S. dollar on Wednesday, may further weaken on the rate rise, hitting India's import bill.
The repo rate, or the interest the central bank levies on short-term borrowing by commercial banks, has been raised to 8.25 percent from 8 percent. Automatically, the reverse repo rate, or interest on short-term lending, gets hiked to 7.25 percent from 7 percent.
The central bank said it was too soon to ease back from its anti-inflationary bias, setting the stage for auto, housing and commercial loans to become dearer once again.
Commercial banks are widely expected to pass on the interest rate burden to customers, which could made consumer and corporate loans dearer, even while raising the interest outgo on existing loans, along with a longer tenure for repayment.
"A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said in a statement.
The RBI's hawkishness, which saw it raise rates by an unexpectedly steep 50 basis points in late July, increasingly jars with dovish talk from central bankers worried about the health of the global economy, with both the United States and euro zone weighed down by debt problems.
It also sets India apart from its Asian neighbours, which have recently rolled back rate hike campaigns.
Headline inflation for August rose to 9.78 percent, data on Wednesday showed, its highest level in more than a year.
India's economic growth has cooled and demand crimped following the cumulative impact of earlier rate increases and rising prices.
"RBI is still viewing rising inflationary expectation as a key risk after a series of 12 rate hikes. This, according to me,
is a real worry so far as rate outlook is concerned," said Nitesh Ranjan, chief economist at Union Bank in Mumbai.
The benchmark 10-year bond yield rose 4 basis points after the central bank kept up its hawkish tone, while the one-year swap rate surged 11 basis points. Shares too trimmed gains to be up just about 0.4 percent from 1.4 percent before the announcement.
While inflation in India was initially driven by food and fuel prices, both largely beyond the scope of monetary policy, it has spread to the core non-food manufacturing sector and remains far above the central bank's perceived comfort zone of 4 to 4.5 percent.
Most economists in a poll released on Monday expected the central bank to raise rates on Friday and then pause in a tightening cycle that has made RBI Gov. Duvvuri Subbarao one of the most aggressive central bankers anywhere over the past two years.
Industrial output in July was the weakest in nearly two years, while India's June-quarter economic growth of 7.7 percent was the slowest in six quarters.
The rupee, which plunged to a near two-year low against the U.S. dollar on Wednesday, may further weaken on the rate rise, hitting India's import bill.
I feel the stand taken by RBI is just a preventive measure. We have not been able to make our economy so robust so as to curb the effects of worldwide disturbances on ourselves. The point here is not being a closed economy but having a buoyant economy that has got internal measures to float itself in case of disturbances and repeated intervention from the regulatory authorities shall not be needed.
ReplyDeleteTeam FINALYST
Goverment and RBI are just covering the things, repo rates have increased 12th time in last 18months with a reason stating that it'll help in curbing the inflation, but nothing positive has happened while due to these rates shoot up Bank Loan rates for general public have increased as well and as a result public is suffering from both sides the cost of commodities is increasing day by day so is the EMI.....
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