The Hindu Business Line : RBI hikes repo rate to 8%

Mumbai, June 11 Interest rates are expected to go up further with Reserve Bank of India hiking its short-term lending rate by 0.25 percentage points with immediate effect.

As part of its on-going effort to contain rising inflation, which surged to 8.24 per cent for the week ended May 24, RBI on Wednesday marked up the repo rate to 8 per cent.

The repo rate is the rate at which RBI lends money to banks under its liquidity adjustment facility.

Inflation, which was 4.36 per cent three months ago, increased to 7.33 per cent for the week ended April 12, and to a high of 8.24 per cent for the seven days ended May 24. “In the light of this and on a review of the current macroeconomic and overall monetary conditions and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis,” noted RBI.

Banks are expected to pick up RBI’s signal and hike lending rates though some of the public sector ones said they may wait until RBI’s quarterly monetary review next month.

Mr Deepak Parekh, Chairman, HDFC, said the repo rate hike would definitely mean pressure on lending rates. “Short-term rates will go up. We will take a call about hiking rates at the end of this month,” he said.

RBI’s measure is a clear indication that interest rates will go up, said Mr M.V. Nair, Chairman & Managing Director, Union Bank of India: “The bank expects to take a call in two weeks.”

Mr A. Mukand, Deputy Managing Director and CFO of State Bank of India, said the RBI move to stem inflation was expected. As far as SBI is concerned the bank’s asset liability management committee will have to take a decision on lending and deposit rates.

The last time the RBI hiked repo was on March 30, 2007.

Since then, the central bank has been using Cash Reserve Ratio (CRR) as a tool to suck out excess liquidity. CRR which is currently at 8.25 per cent was hiked twice this April.

The hike in repo rather than the reverse repo rate is a signal to banks that they should be managing their own liquidity while being cautious of overlending, said Mr. Nair.

Treasury officials said the hike in the repo rate may help arrest the fall of the rupee but may see bond yields harden.

The RBI also increased the limit of liquidity support to oil companies to Rs 1,500 crore per day.