Another interest rate hike by RBI, borrowers to feel pinch

Mumbai: Personal and corporate loans will become more expensive, with the RBI today raising key interest rates sharply for the third time in the last three months, by 0.50 per cent, to arrest price rise.

The central bank, in its quarterly review of the monetary policy, has also revised its fiscal-end inflation projection to 7 per cent from 6 per cent earlier. It has retained the growth project for the current fiscal at 8 per cent.

With a 50 bps hike, the repo rate (at which the RBI lends to banks) would be 8 per cent and the reverse repo rate (at which it borrows from banks) to 7 per cent. However, the cash reserve ratio (CRR), the amount all banks need to park with RBI, remains unchanged at 6 per cent.

All loans, including auto, home, personal and other corporate borrowings, are expected to cost more following the RBI`s decision.

Expectedly, industry expressed its disappointment over the sharp increase in interest rates, saying the move would harm the investment sentiment.

"We thought it would be 25 basis points. The RBI has seen something which industry has not… investment sentiments will be muted in the next six months," Ballarpur Industries Limited Chairman Gautam Thapar told PTI.

The stock market also reacted sharply, plunging by over 300 points within minutes of the RBI`s policy announcement.

"Notwithstanding signs of moderation, inflationary pressures are clearly very strong… inflation continues to be the dominant macroeconomic concern. On the basis of this assessment, it has been decided to increase policy repo rate by 50 basis points from 7.5 to 8 per cent with immediate effect," RBI Governor D Subbarao said while unveiling the the monetary policy.

Inflation, currently hovering above 9 per cent, he said, would continue to guide the policy stance in future. The RBI`s next review is scheduled on September 16.