India’s central bank hikes rates again to fix inflation (Roundup)

MUMBAI - With inflation still above its comfort zone, India’s central bank Tuesday hiked both its short-term borrowing and lending rates by 25 basis points each that could trigger higher interest rates on housing, auto and corporate loans.

The Reserve Bank of India revised repurchase rate upward to 6.25 percent from 6 percent and hiked the reverse repurchase rate to 5.25 percent from 5 percent in the sixth such interest rate tweak this year.

RBI Governor D. Subbarao, who conducted the bank’s second-quarter review of monetary policy for this fiscal, said the overall objective was to contain the annual inflation rate in the region of 4-4.5 percent, against 8.6 percent now.

“Although the headline inflation has moderated in recent months, the current rate of inflation is still well above the comfort zone of the Reserve Bank,” Subbarao said. The central bank, however, retained its growth forecast to 8.5 percent for this fiscal.

The Governor, however, said that the central bank may not go in for another rate hike this year.

“Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low,” Subbarao told reporters, adding that the immediate future could be about three months.

“I am not ruling out any action in December or January but we believe that unless there is some unforseen development, we will refrain from action,” said Subbarao.

The other policy rates such as bank rate, cash reserve ratio and the statutory liquidity ratio were kept unaltered.

In the previous mid-quarter review Sep 16, the central bank had hiked its short-term borrowing and lending rates by 50 basis points and 25 basis points respectively.

This review had seen the sixth such rate hike since the apex bank decided to tighten its monetary policy in January to tame inflation — first on Jan 29, followed by another on March 19, and again on July 2, then on July 27 and further on Sep 16.

Subbarao said Tuesday’s measures will sustain the anti-inflationary thrust of recent monetary actions, rein in rising inflationary expectations and are moderate enough so as to not disrupt growth.

Planning Commission Deputy Chairman Montek Singh Ahluwalia supported the RBI’s decision.

“This adjustment is a good balance between responding to inflationary concerns, which is very important and at the same time not doing anything that would in a serious way disrupt growth,” Ahluwalia told reporters in New Delhi.

Indian equities markets largely shrugged off the news, but interest rate sensitive realty and auto stocks came under selling pressure.

The 30-share sensitive index (Sensex) of the Bombay Stock Exchange (BSE) closed flat at 20,345.69 points, consolidating after a two-day rally.

Industry lobbies, however, were wary of the rate hike impacting growth of interest sensitive sectors like consumer durables, auto and housing.

“Going by RBIs own submission, the IIP data although robust has been highly volatile signalling uncertainty in growth, said Amit Mitra, secretary general of Federation of Indian Chambers of Commerce and Industry.

Chief executives of commercial bank, who had converged at the RBI headquarters, told reporters that interest rates could go up due to rate hike and the central bank’s directive to increasing provisioning for home loan defaults.

“It could lead to a increase in 5-10 basis points,” State Bank of India (SBI) chairman O.P. Bhatt told reporters. SBI is the largest bank by market share in India.

The country’s largest private lender, ICICI Bank’s chief executive Chanda Kochhar said she expected “some amount of upward bias in the interest rates” in the near future.