Home and auto loans may cost more as the RBI raised its short-term lending and borrowing rates by 25 basis points each yet again on Thursday with a view to check spiralling prices of essential commodities.
This is the eighth time since March 2010 the RBI has resorted to policy rate hike to tackle inflation, which is ruling above 8 per cent, much above the comfort level of 5-6 per cent.
In view of the rising fuel prices, following unrest in the middle-East and high food prices in the domestic market, the RBI has upped its March end inflation forecast to 8 per cent from 7 per cent projected earlier.
The short-term lending (repo) rate has been hiked to 6.75 per cent and the short-term borrowing (reverse repo) rate to 5.75 per cent with immediate effect. While the RBI injects liquidity through repo rate, it absorbs funds through reverse repo window.
As regards the impact of monetary action on interest rates, Indian Overseas Bank (IOB) Chairman and Managing Director M Narendra said the RBI measures may not lead to immediate hike in interest rates.
"I think rates would remain stable during this month. Beyond March it would depend on various factors like money market, call money rate etc," he said.
The initiatives, RBI said, are expected to rein in demand-side inflationary pressures and contain the spillover of food and commodity price rise to other sectors.
It further said that the RBI would "persist with the current anti-inflationary stance".
The overall inflation was at 8.31 per cent in February this year compared to 8.23 per cent a month ago.
The Reserve Bank also warned that sharp rise in oil prices following turmoil in the Middle East and North Africa would have implications for the economy especially inflation.
"... coming on top of already elevated food and other commodity prices, the spike in (global) oil prices has endangered inflation concerns," the central bank said.
It also warned that continuing uncertainty about energy and commodity prices may "vitiate" the investment climate, posing a threat to the current growth trajectory.
Although indicators like tax collections, exports and bank credit suggest persistence of growth momentum, "the weak performance of capital goods in the IIP (Index of Industrial Production) suggests that momentum may be slowing down."
IIP recorded a modest growth of 3.7 per cent in January, while capital goods output contracted by 18.6 per cent.
Referring to the liquidity conditions, RBI said although the industry could witness "some temporary pressure" in the second half of March on account of advance tax collections, the situation would be close to the comfort level.
Taking comfort from moderation in the pace of credit expansion, RBI said, "monetary transmission is increasingly visible as banks continue to raise their lending rates."
RBI has been gradually increasing key policy rates since March 2010 to tame inflationary expectations.
On the natural disaster in Japan, the central bank has said it was too early to assess the impact, but it added "... substitution of thermal for nuclear energy in Japan may exert further pressure on petroleum prices."
However, it said that expenditure on reconstruction in Japan, once the normalcy is restored, would provide boost to the global economy.
As the oil prices continue to pose problems, the RBI has asked the government to focus on quality of expenditure as increase in subsidy on petroleum and fertilisers could put pressure on fiscal deficit in 2011-12.
Finance Minister Pranab Mukherjee, in his Budget speech last month, proposed to bring fiscal deficit down to 4.6 per cent in 2011-12 from 5.1 per cent in this year.
"While the budgeted level of fiscal deficit for 2011-12 gives some comfort on the demand front, a potential increase in subsidies on petroleum products and fertilisers as a result of high crude prices could put pressure on expenditure.
"It is critical, therefore, to focus on the quality of expenditure, keeping the aggregate under control without compromising on the delivery of services," RBI said.
Referring to issues concerning the Current Account Deficit (CAD), RBI said the government should focus on steps to attract foreign direct investment (FDI) to enhance sustainability of Balance of Payments over the medium term.
Going by the robust performance of exports, the central bank said the CAD for 2010-11 "is now estimated to come lower than earlier expected, at around 2.5 per cent of the GDP."