EMIs for home and auto loans may rise after RBI raises repo rate by 0.25 per cent.
Mumbai: EMIs for home and auto loans may rise after Reserve Bank Governor Raghuram Rajan unexpectedly raised a key policy rate by 0.25 per cent on Tuesday to fight inflation.
The RBI, in its Third Quarter Review of Monetary Policy, increased the short-term lending (repo) rate to 8 per cent from 7.75 per cent and indicated a pause in terms of further rate hikes.
Read here: No change in inflation goalposts, CPI to be in focus: Raghuram Rajan
The central bank lowered its growth forecast for the current financial year to less than 5 per cent from its earlier forecast of 5 rpt 5 per cent and said inflation will continue to hover around 8 per cent in the next fiscal.
"...an increase in the policy (repo) rate by 25 basis points is needed to set the economy securely on the recommended disinflationary path," Rajan said.
Consequently, the reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent. However, the RBI kept the cash reserve ratio unchanged at 4 per cent as liquidity seems to be comfortable. It was widely expected that Rajan would maintain the status quo on rates to support growth.
Ahead of the quarterly review, Rajan had termed inflation a 'destructive disease'.
While industry expressed its 'disappointment', bankers said they will take a view on raising interest rates, depending on demand for credit and other factors.
The asset liability committee of the country's largest lender State Bank of India will review interest rates shortly. "While the Governor has given a repo rate increase, he has clearly said that this could be end of the tightening cycle," SBI Chairperson Arundhati Bhattacharya said.
"As of now it (interest rate hike) looks unlikely, but we need to look at the overall data and then take a decision," SBI Managing Director A Krishna Kumar said. Commenting on the policy, Ficci said, "Rise in repo rate has disappointed industry...We also hope the banks will not hike the lending rates as this would scuttle revival."
The policy rate has been increased thrice, by 0.25 per cent each, since Rajan took over as Governor in September. Defending the policy stance, Rajan said a rate cut would not have affected banks or borrowers and that bringing down retail prices is the key to sustainable growth.
"If we cut policy rates, it won't have any impact on banks' cost of funds or lending rates for borrowers," Rajan told reporters at the customary post-policy press conference.
Retail inflation, at 9.87 per cent last month, is expected to be above 9 per cent in the fourth quarter and 7.5-8.5 per cent in Q4 of the next financial year, the RBI said.
"Consumer price inflation is too high, we need to bring it down...and we should be able to reach the 8 per cent objective by end of the year with this rate hike," he added.
The RBI's baseline projections for retail inflation indicate that over the ensuing 12-month horizon, and with the current policy stance, there are upside risks to the central forecast of 8 per cent.
"The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture," he said.
The Governor said economic growth would be below 5 per cent in the current financial year and could accelerate in 2014-15 to a mean projection of 5.5 per cent. Rajan said growth is likely to lose momentum in the third quarter of 2013-14. Economic expansion in the first half of 2013-14 was 4.6 per cent.
In order to record a 5 per cent in the full year, second-half growth should be 5.4 per cent. On the external sector, Rajan said a silver lining is the significant narrowing of the trade deficit on the back of resilient export growth.
"The current account deficit for 2013-14 is expected to be below 2.5 per cent of GDP compared with 4.8 per cent in 2012-13," he said. Stocks fell sharply after the policy announcement and remained volatile through the day. The benchmark Sensex closed at 20,683.51, down 0.12 per cent.
Next: Sensex trims losses after Rajan indicates pause in rate hikes
Sensex trims losses after Rajan indicates pause in rate hikes
Mumbai: After falling over 150 points in a knee-jerk reaction to RBI rate hike, the Sensex trimmed losses to end a mere 24 points down on Tuesday after Governor Raghuram Rajan indicated that further tightening may not be needed.
The BSE benchmark, which touched a two-month intra-day low after RBI increased the short-term lending rate by 0.25 per cent, was hit by a sharp 8 per cent drop in Maruti Suzuki India shares after announcing quarterly earnings.
The 30-share barometer resumed almost stable and immediately touched a high of 20,795.35. It fell after news of rate hike filtered in and tumbled to a low of 20,554.28. Later, it rebounded on buying in metal, realty and FMCG stocks to end down by 23.94 points, or 0.12 per cent at 20,683.51.
In three straight sessions, it has lost 690 points.
"...if inflation eases at a pace that is faster than we currently anticipate, and that reduction is expected to be sustained, the Reserve Bank will have room to become more accommodative," Rajan said.
Tata Motors and Tata Steel led 16 Sensex gainers while Maruti and Axis Bank led the 13 losers. GAIL closed unchanged. The 50-issue NSE Nifty eased 9.60 points, or 0.16 per cent, to close at 6,126.25.
"The indication that the rate increases are done with for now is welcoming. Rates are likely to fall over the course of next fiscal...," said Sanjeev Zarbade, Vice President- Private Client Group Research, Kotak Securities. Overnight heavy selling by Foreign Institutional Investors (FIIs) also kept the market under pressure.
FIIs sold shares worth Rs 1,334.21 crore yesterday, as per provisional data with stock exchanges. Rise in European stocks at opening, short-covering after the recent heavy sell-off ahead of expiry of January contracts on Thursday also helped the recovery in the local equities, a broker said. Global investors avoided heavy bets ahead of the two-day Federal Open Market Committee meet, which starts later today.
The rupee closed 59 paise up at 62.51 against US dollar. Jignesh Chaudhary, Head of Research, Veracity Broking Services said, "A positive rupee, which was aided by some good dollar sales by state run banks, also helped the equity markets recover from its day's low."
Asian stocks ended mixed before the US Federal Reserve meets to discuss a further reduction in stimulus. There are expectations that Fed would dial back its monthly bond purchases by another USD 10 billion.
Key benchmark indices in Hong Kong, Japan and Taiwan declined up to 1.58 per cent while indices in China, Singapore and South Korea moved up. European markets were trading higher in early trades as indices in France, Germany and UK firmed up by up to 0.78 per cent.
Coming back to the local market, major Sensex losers were Maruti Suzuki (8.12 per cent), Axis Bank (3.28 per cent), Sun Pharma (2.44 per cent), Infosys (1.49 per cent), Cipla (1.30 per cent) and HUL (0.94 per cent). Tata Steel (3.49 per cent), Sesa Sterlite (2.46 per cent), Tata Motors (2.43 per cent), Hindalco (2.16 per cent), Bajaj Auto (1.69 per cent) and BHEL (1.11 per cent) gained.
Among the S&P BSE sectoral indices, IT fell by 1.06 per cent and Teck slipped 1.06 per cent, while the Metal index rose 1.72 per cent and Realty jumped 1.08 per cent. At the end of the day, the market breadth appeared slightly positive as 1,299 stocks ended in the green while 1,243 finished in the red. The total turnover shot up to Rs 2,450.58 crore from Rs 1,867.10 crore on Monday.
