Monday, 17 December, 2018

EMIs to cost more as RBI raises lending rates, India Inc disappointed

RBI raises key policy rate by 25 bps to 6.50%, holds stance at neutral RBI hikes repo rate by 25 bps to 6.50%, EMIs may go up
Kelvin Reese | 05 August, 2018, 19:47

If the RBI increases the rates by 25 basis points, it would be the first time since October 2013 that the central bank has hiked borrowing costs at two consecutive policy meetings.

The Reserve Bank of India raised the rate at which it lends to banks from 6.25% to 6.5% on Wednesday, after hiking it for the first time in four years in June.

Economists forecast that the bank's Monetary Policy Committee will raise the rate from 0.50 percent to 0.75 percent, the highest level since March 2009.

Meanwhile, reverse repo, the rate at which the central bank borrows money from commercial banks within the country, was adjusted to 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

"While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt", said Richard Haymes, head of financial difficulties at credit data firm TDX Group.

In terms of inflation, RBI said, it is projected at 4.6 per cent in second quarter, and 4.8 per cent in the second half of 2018-19.

The statement noted that "fuel and light group" inflation rose sharply in the period since the previous policy review, pulled up by liquefied petroleum gas (LPG) and kerosene prices.

The Bank of England has increased interest rates for the second time since the financial crisis in a widely expected move.

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The Reserve Bank of India governor-headed MPC in a statement, issued after three-day meeting, said, "robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand".

He said the final Brexit deal was "potentially the most important" factor that would influence monetary policy in the coming months and years, and added that the Bank was ready for all outcomes.

Some economists have raised doubts about the case for the rate hike.

Bank deposits at Rs 114.8 lakh crore grew by 0.5 percent during April 1- July 18 compared with a contraction of (-) 1.5 percent growth in the corresponding period previous year. "Today's "decision of the MPC is consistent with the neutral stance of monetary policy", given the upside pressure that inflation continues to exhibit".

"We don't expect another rate rise before May 2019".

With levels of household debt rising in recent years, some campaigners are concerned that many families will struggle to afford the consequent increase in their mortgage costs.

He said "limited" and "gradual" increases were required to bring inflation down to its 2 per cent target now that the United Kingdom economic growth appeared to be picking up again.

However the MPC says it "continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of European Union withdrawal". Markets are already expecting a rise, and from here on in, further hikes are going to be few and far between because United Kingdom economic growth is so fragile.

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