The EMIs on your home, car and personal loans are likely to increase, as a hawkish Reserve Bank of India governor Raghuram Rajan belied expectations on Friday by raising the repo rate, on which banks base their lending rates, by 0.25 percentage points to 7.50%.
RBI governor Raghuram Rajan addresses a press conference after his maiden policy review meeting in Mumbai. (PTI Photo)
Soon after, Pratip Chaudhuri, chairman of State Bank of India, India's largest commercial bank, said he expected lending and deposit rates to go up.
This will greatly disappoint consumers, especially as it comes just ahead of the festival season when many buy cars, two-wheelers, TVs and other consumer durables with bank loans.
But Rajan, like his predecessor D Subbarao, is determined to rein in inflation, which, at the wholesale level, rose to 6.1% in August, above the RBI's comfort level of 5.5%.
At the retail level, it was at the still high level of 9.52% last month.
The stock markets had been hoping for a rate cut to generate demand and spur growth, which had fallen to a new low of 4.4% in the April-June 2013 quarter.
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Hope belied, the benchmark BSE Sensex crashed 600 points within minutes of the RBI announcement after 11am before regaining some lost ground. But it still closed 382.93 points down at 20,263.71.
The rupee, which had rallied smartly to 61.77 per dollar on Thursday after falling to an all-time low of 68.85 on August 28, ended the day 46 paise down at 62.23 per dollar.
Sanjay Bhargava, general secretary of the Chandni Chowk Sarv Vyapar Mandal, a traders' association, said the RBI move to increase rates would definitely hit spending during the festive season.
"We will have to offer deeper discounts to woo buyers. But how can discounts help when buyers don't have money?"
Justifying the decision to hike the repo rate, Rajan said, "Inflation is high and household financial savings are lower than desirable."
VIDEO: RBI hikes repo rate to 7.5%
He, however, added this should not be interpreted to signal RBI's preference for containing inflation at the cost of growth.
"The hike in the repo rate should not be interpreted to mean that growth has taken back seat and is not a priority. Inflation and growth are both priorities for the RBI… We must create a bullet-proof national balance sheet and growth agenda, which creates confidence and citizens and investors alike," Rajan said.
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