Mumbai: Home, auto and personal loans are set to get costlier as the Reserve Bank (RBI) raised the repo rate, the rate at which it provides funds to banks by 25 basis points citing runaway inflation.
This is the second consecutive rate hike by RBI after it increased the repo rate by similar percentage points in its June policy meet. However, the monetary policy committee (MPC) maintained its neutral stance on its policy outlook. Following the hike, the repo rate stands at 6.5 per cent and the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.25 per cent.
“The reason for changing the policy rate is to ensure that on a durable basis, we come to and maintain the 4 per cent inflation target. We have been away from 4 per cent number for several months now. And we took two steps once in June and once in August to maximise our chances that we don’t drift away from 4 per cent and infact we move towards 4 per cent on a durable basis,” said Urjit Patel, governor, RBI. The MPC is also worried over the impact of the minimum support price (MSP) for kharif crops on inflation as it feels that increase in MSP is much larger than the average increase seen in the past few years.
Over the last 6 to 12 months, Dhaval Kapadia, director, portfolio specialist at Morningstar Investment Adviser said, the borrowing costs for corporates, banks and other institutional borrowers have been rising with yields across the curve on instruments ranging from Commercial papers, certificate of deposits, corporate bonds, T-bills and government bonds rising by 125 to 150 basis points probably on account of reduced appetite for corporate lending by banks.
“RBI’s action to hike the repo rate by another 25 bps might result in a marginal increase in lending rates for corporate and retail borrowers with a lag,” he added.
The MPC noted that retail inflation, measured by the year-on-year change in the CPI, rose from 4.9 per cent in May to 5 per cent in June, driven by an uptick in fuel inflation.
While inflation projections for Q2 have been revised marginally downwards when compared to the June statement, projections for Q3 onwards remain broadly unchanged with the households’ inflation expectations, as measured by the Reserve Bank’s survey, rising significantly in the last two rounds. This according to RBI could influence actual inflation outcomes in the months to come.
The monetary policy committee, however, expressed confidence about the growth recovery in the domestic economy with capacity utilisation at Indian factories remaining robust and construction activity gaining momentum reflecting the government’s thrust on national highways and rural housing.
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