RBI hikes repo rate by 25 basis points; home, auto loans likely to get costlier

The Reserve Bank of India (RBI) on Tuesday raised the repo rate by 25 basis points to 8.5 per cent. The rate hike is the 13th since early 2010 but the RBI said it was likely to hold off on further increases as it expects high inflation to ease beginning December. The central bank also deregulated savings bank deposit rate with immediate effect.

The hike will make home and auto loans costlier with banks likely to pass on the hike and put further pressure on economic growth.

With food inflation entering double digit figures and headline inflation almost touching the mark, most analysts did feel the central bank would increase repurchase rate by 25 basis points to 8.50 per cent.

The RBI has hiked key policy rates 12 times since March 2010 to control inflationary pressure. However, that hasn't helped in bringing down inflation much.

The central bank hiked repo and reverse rates by 25 basis points each to 8.25 per cent and 7.25 per cent respectively last month.

Food inflation rose sharply to cross double digit levels at 10.6 per cent for the week ended Oct 8 as against 9.32 per cent in the previous week. The headline inflation based on the wholesale price index was recorded at 9.72 per cent in September, according to the latest official data.

Inflation has remained almost near double digit since January 2010, despite an aggressive monetary tightening by the central bank and the claims of a series of fiscal measures by the government.

However, the rate hike has shown its negative impact on the economic growth. Industrial production has slowed down considerably in the past few months. It was registered at a sluggish 4.1 per cent in August rising a bit from the 3.8 per cent seen in July -- its lowest in almost two years.

GDP growth slowed to 7.7 per cent in April-June period, the weakest in six quarters.

With rising cost of inputs and high interest rates, industrial output is likely to remain subdued in the coming months.

According to a recent survey by the Confederation of Indian Industry, business confidence, especially among smaller firms, has declined in recent months.

The CII's quarterly business confidence index has declined by 2.5 per cent in the third quarter of 2011-12 as compared to the previous quarter. (Times of India)