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Interest rate hike likely on Tuesday

business Updated: Jan 23, 2011 01:07 IST
HT Correspondent
HT Correspondent
Hindustan Times
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Expect your EMIs to go up further. The Reserve Bank of India is likely to raise interest rates in its quarterly monetary review on Tuesday, as the inflation rate is stubbornly clinging to a high perch.

The wholesale price index-based inflation rate reached 8.43% in December from the previous month’s 7.43%, although the RBI’s year-end projection was 5.5%.

The apex bank has raised the key rates six times so far in 2010-11 as food prices recorded a double-digit rise, pummelled by the vegetable supply crunch.

“I see the hardening of raw material prices and the rising cost of capital as key factors impacting the growth of manufacturing in coming months,” said Amit Mitra, secretary general of industry chamber Ficci.

RBI governor D Subbarao, along with other financial sector regulators, met finance minister Pranab Mukherjee on Friday in a pre-budget meeting.

Economists expect both the repo rate — at which the RBI lends — and the reverse repo rate — at which it borrows — to go up by 0.25 percentage points on Tuesday. Last month, the repo and reverse repo rates were 6.25% and 5.25%, respectively.

While the higher repo will raise banks’ borrowing costs and finally make capital costlier for the home, auto and corporate sectors, the reverse repo hike will suck out excess cash from the system to cool prices.

Price-interest tangle

7.43% Wholesale Price Index for November
8.43% Wholesale Price Index for December
5.5% Reserve Bank’s projection for 2010-end

6.25% Repo rate for December
5.25% Reverse Repo rate for December
Experts expect another 0.25 percentage point hike