Inflation fears make RBI rush in, raise rates

The RBI was widely expected to raise the rate in its credit policy in mid April, but chose not to do so then. Today’s development—a rare move between scheduled monetary reviews—comes days after the government raised petrol and diesel prices.

RBI did not explain its reasons other than saying it had carried out a review of current macroeconomic and overall monetary conditions.

Bankers say RBI’s move will result in rates on all loans—including retail and corporates—to go up. The only silver lining is that, at the same time, deposit rates will also move up accordingly. The stock market, however, could dip further as loans against shares will also cost more, increasing the cost of borrowers.

In fact, the stock markets were already on a journey southwards as there were reports that the US government will raise interest rates. Bond yields or returns neared four-year highs and rate hike fears spooked investors who sold shares heavily today pulling the BSE Sensex down by almost 461 points.

‘‘The RBI move can be viewed as a preventive move to control inflation. This could lead to a lending rate hike by banks, the quantum of which could be worked out in the coming few days,’’ IDBI Bank’s CEO G V Nageshwara Rao said.

In its quarterly review, the RBI had warned that inflation could hit 5.5% this year due to rising oil prices.

Reddy for rate hike

• RBI had raised reverse repo the rate at which it absorbs funds from banks — by 0.25% to 5.75%

• It also raised repo rate the rate at which it lends overnight funds to banks — by 0.25% to 6.75%

• Bank Rate — the rate at which RBI refinances banks — remains unchanged at 6%, lowest in 30 years

The Factors

• High global oil prices, and its impact on inflation

• Skyrocketing bank credit, concerns about asset bubble

• Globally, interest rates have been going up to tighten liquidity