RBI raises repo rate, loans to become costlier
By Joseph Samson
Jun 13, 2008
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In the face of surging inflation, the Reserve Bank of India hiked its short-term lending rate to banks by 0.25 per cent to 8 per cent. This development may have an effect on consumer, home, auto and other loans, making them costlier.

This increase comes in the wake of inflation reaching a 45-month high of 8.24 per cent. The central bank said the decision was taken to contain inflationary expectations as the rate of rise in prices had reached record proportions and hence, it was important to increase it from 7.75 per cent.

There is more worry in store, as analysts have said that inflation is expected to climb over nine per cent once hike in petroleum prices gets reflected in the official wholesale price index.

This move of increasing the repo rate, at which the central bank gives short term money to banks in exchange of government securities, has been taken for the first time this fiscal year. The central bank had earlier tried to contain inflation by raising cash reserve ratio-- the mandatory deposits that banks keep with RBI.

Commenting on RBI decision, Chairman of Punjab National Bank, K C Chakrabarty said, "All interest rates would be affected. We will take decision by month end. It (the move) will increase the cost of resources." Country's largest lender SBI also said that it would examine lending and deposit rates on Friday. Home loan rates may also rise after the Reserve Bank's step, real estate company Unitech said.

HDFC Bank Chief Economist Abheek Barua said,"This (repo rate hike) will have an implication on the bank's lending rates. I think the Prime Lending Rates of the banks will go up by about 50 basis points. There would also be a revision of bank's deposit rates."

However, the reverse repo rate, at which RBI borrows money from banks in exchange of the government papers, remained intact at six per cent.

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