Wednesday, November 3, 2010

RBI Hikes Interest Rates by 0.25%

RBI Hikes Interest Rates by 0.25%

 

The Reserve Bank of India (RBI) on Tuesday raised the lending and borrowing rate by 0.25 per cent, or 25 basis points (bps). This is the sixth time this year the central bank has raised the policy rates to curb spiraling inflation.

 

The RBI raised the repo rate at which it lends to banks to 6.25 per cent and the reverse repo rate at which it absorbs excess cash to 5.25 per cent. The bank rate and the cash reserve ratio (CRR) have been retained at 6 per cent.

 

Expressing its concern over inflation, RBI said, "Both demand side and supply side factors are at play. Inflationary expectations also remain at an elevated level. Given the spread and persistence of inflation, demand side inflationary pressures need to be contained and inflationary expectations anchored."

 

The central bank said that the stance of its monetary policy was intended to contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures and maintain an interest rate regime consistent with price, output and financial stability.

 

Wholesale inflation rose to 8.62 per cent in September on higher food prices from 8.5 per cent in August. It was in double digits for six straight months through July.

 

However, RBI was cautious in its approach so as not to 'disrupt the growth' of the economy. It said that through the policy moves it intended to 'actively manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows.'

 

While RBI is concerned with the inflation scenario, it also acknowledges the fact that excessive tightening and 'liquidity deficit' scenario could be counter productive to the economy. RBI has clearly indicated that we are at the end of the interest rate hikes, unless off-course we have extra-ordinary events. This augurs well for the markets.

 

K Ramanathan, chief investment officer (CIO), ING Investment Management:

 

RBI's rate hike move was in line with market expectations. However, RBI has said that based on current data, the possibility of another rate hike in immediate future remains low, which is very positive for fixed income markets. Also, to ease concerns on severely tight liquidity, post policy, RBI has announced buyback of bonds, which is also supportive for the markets.

 

We expect inflation to come off in the next few months due to higher base effect, which along with diminishing supply of government securities could give rise to further softening bias in interest rates.

 

Sudhakar Shanbhag, CIO, Kotak Mahindra Old Mutual Life Insurance:

 

After the RBI's move, the 10 year G-Sec rate is expected to trade in the range of 7.90-8.10 per cent in the immediate term and will look for direction based on inflation moderation (expected from November onwards due to base effect), credit pick up and RBI's stance. The equity markets have not reacted much to the announcement since the rate increase is on expected lines.

 

 

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