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Price heat: Brace for another rate hike from RBI

Expect the equated monthly installments or EMIs on your home loans to go up further, a move that that could dampen spirits during Diwali.

business Updated: Oct 24, 2011 02:04 IST
HT Correspondent

Expect the equated monthly installments or EMIs on your home loans to go up further, a move that that could dampen spirits during Diwali.

In the continuing tug-of-war between sliding growth and rising inflation, the Reserve Bank of India (RBI) is widely expected to raise interest rates once again in its mid-year monetary policy review on Tuesday — for the 13th time in 19 months.

“While the RBI’s policy decision remains a close call, we expect the central bank to deliver another rate hike of 0.25 percentage points — in contrast to most other central banks — as headline and core inflation remain too high,” said Rahul Bajoria, regional economist at Barclays Capital.

There will also be more focus on the accompanying policy statement, which the stock market and economists will scrutinise closely for the RBI’s assessment of the current economic situation and forward-looking cues.

Apart from the action on rates, the RBI is likely to cut its 2011-12 GDP growth forecast of 8% to about 7.5%, confirming that the slowdown in the broader economy is for real.

India’s inflation rate in September rose to 9.72%, driven by high prices of manufactured products.

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High inflation has hurt investments and expansion plans of companies. “There are concerns about investment intensions,” Harsh Pati Singhania, managing director, JK Paper Ltd told HT. “The industry is not yet ready to invest as it expects the slowdown to continue because interest rates are high and demand for goods such as cars are showing significant signs of weakness.”
Last month, the RBI raised the repo and reverse repo rates by 0.25 percentage points each to 8.25 % and 7.25% respectively.

A higher repo — the rate at which the RBI lends to banks — pushes up banks’ borrowing costs, prompting them to increase interest rates for final home, auto and corporate borrowers.

A higher reverse repo — the rate at which the RBI absorbs excess cash — means it would suck cash from the system to stymie demand and cool prices.

India’s economy grew by 7.7% during April to June, the slowest in 18 months, mirroring signs of a slowdown. Most experts expect the economy to have slowed even further during the second quarter (July- September), the data for which will be released next month.