Reserve Bank of India hiked repo rate by 50 bps, more than expected

RBI raised interest rates by a higher-than-expected 50 basis points on Tuesday (26th July, 2011), stepping up its fight against persistently high inflation despite slowing growth in India, Asia's third-largest economy.

Markets were eagerly awaiting for this Policy, as it was being expected as the last such hike by the RBI to curb Inflation. At the same time, Markets were expecting only an increase of 25 Basis Points, but RBI gave a Big Surprise to the markets by increasing it by 50 Basis Points.

The repo rate, the rate at which the central bank lends short-term money to banks, has been hiked by 0.50 percent to 8 percent and the reverse repo rate, the rate at which the central bank borrows from the banks, has been hiked by 0.50 percent to 7 percent. The cash reserve ratio or CRR remained unchanged at 6 percent.

The hike is likely to further dampen the demands for home and car loans which are already the lowest in recent months.

The rate increase is its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks.

Still, wholesale price index inflation was 9.44 per cent in June, more than double the central bank's comfort level, and high prices are expected to persist in coming months.

The central bank, whose forecasts for inflation have proven optimistic in recent quarters, increased its outlook for wholesale inflation at the end of the fiscal year in March to 7 per cent, from 6 percent earlier.

Recent industrial output and manufacturing data was the worst in nine months, while sales of cars have slowed sharply and loan demand is easing, complicating the central bank's inflation-fighting task.

RBI's Governor has indicated in the earlier policy too, that unless the Inflation will comes into control the Interest Rates will be kept on increasing trend by them, even on the cost of Growth Rate.

This hike would again be a Negative Blow for AUTO, REALTY & INFRA, CAPITAL GOODS and METAL Sectors. Loan Growth has already being dampened and will dampen more now for the BANKS too. Not only Corporate but Individual too are facing problem in raising loan for most important needs to, due to increasing Interest Rate Cost.

Prices of REALTY is expected to go down by almost 20% in Mumbai after this hike and also the Office and Residential Rentals, this and other factors too will help the Inflation to come down to a Comfortable level.