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RBI Guv Spooks Markets With Repo Rate Hike

SEPTEMBER 20, 2013

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The new RBI governor Raghuram Rajan has come out with his first policy review, hiking interest rates, defeating analysts' predictions and leading to sharp falls in the stock market. Rajan has hiked the benchmark interest rate from 7.25 to 7.50%..The RBI says that inflation has to be lowered to more tolerable levels. The move may result in interest rates on home and auto loans.



The bourses reacted negatively and the benchmark BSE Sensex fell 383 points on Friday, the most in three weeks. Realty, bank and auto stocks tumbled as worries over higher rates would make loans more expensive and reduce their profits. Economists were looking forward to stability in rates despite the annual inflation recahing a  6-month high of 6.1% this week.



While businesses and the government would love a rate cut to help revive the sluggish growth, it could potentially push inflation higher and further weaken the rupee, which had hit record lows in the weeks before the new governor took charge.



* Short-term lending rate (repo rate) hiked by 25 basis points to 7.50%. 


* Minimum daily liquidity maintenance of CRR to 95 %  from 99%.

* No change in Cash Reserve Ratio (CRR- at 4%)

* Wholesale Price Index (WPI) inflation projected to be higher than that estimated earlier.

* Economic growth trailing below potential.


* Pace of infrastructure project completion subdued, new projects' starts remain muted.


* Inflation worrisome, no room for complacency.





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