Recent Changes In Interest Rate Of R.B.I.

S.Y.B.M.S (B)

DETAILS:GROUP MEMBERS:-

      

Karishma Koli Mandar Bhoir – Chandresh Bhanushali Swapnil Shinde – Jatin Mane – Anand Kobnak – Gaurav Sharma –

105 113 114 115 116 117 120

PROJECT SUBJECT: - Recent Changes In Interest Rate Of RBI

CLASS: - SYBMS

DIV :- B

SEM – III

We are thankful to Prof.Acknowledgement We take this opportunity to express our sincere gratitude towards all those who directly and indirectly assisted us in creating our project. . His supportive nature and technical assistance made us comfortable at every step. who provided an opportunity to make a project.

more increase indicated  Increase in Repo Rate by 0.5%  RBI moots deregulation of savings bank interest rate  RBI ups key interest rates by 25 bps to tame inflation  Highlights of mid-quarter review of RBI monetary policy  RBI mid quarterly review needs to change policy to control inflation  More hike in interest rates  Small Industries want status quo on interest rate  Another 50 bps rate hike likely in next 3 months:  RBI set to raise key rates by 25 basis points today  Market reaction on Reserve Bank of India rate hike  Effects of changes in interest rates by RBI  What does a cut in interest rates mean for the stock market?  Expert views on RBI rate hike  New announcements of rise in interest rates .Index  Introduction  What does Mean By Interest rates ?  Types of interest rates  Reasons for interest rate change  How RBI rate hike impacts your financial life  RBI hikes Interest rate again.

there are four other Non-Official Directors. a small company borrows capital from a bank to buy new assets for their business. Chennai and New Delhi. 1935 in accordance with the provisions of the Reserve Bank of India Act. Non-Official Directors are nominated by the government. .Introduction:The Reserve Bank of India was established on April 1. one each from four local boards in Mumbai. Interest rates are normally expressed as a percentage rate over the period of one year. inflation. For example. and unemployment. Though initially RBI was privately owned. RBI has 22 regional offices and most of them are located in state capitals. and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. The functions of Reserve Bank are governed by central board of directors. As per the Reserve Bank of India Act there are Official Directors and Non-Official Directors. Interest rates targets are also a vital tool of monetary policy and are taken into account when dealing with variables like investment. 1934. it was nationalized in 1949. These include ten Directors from various fields and one government official. There cannot be more than four Deputy Governors. Kolkata. What does Mean By Interest rates ? An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. The directors are nominated / appointed for a period of four years. The Official Directors are appointed by the government and include Governor and Deputy Governors of RBI. Deposit Insurance and Credit Guarantee Corporation of India (DICGC). The board is appointed by the Government of India. The Reserve Bank of India also has three fully owned subsidiaries: National Housing Bank (NHB). Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL). Apart from these. Its central office is in Mumbai where the Governor of RBI sits.

Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. Marginal Standing Facility Rate : Under this scheme. Reverse Repo RateReverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Bank Rate.Types of interest rates. RBI is using this method (increase of CRR rate). It can cause the money to be drawn out of the banking system. CRR Rate in IndiaCash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. a short term for repurchase agreement. The rate at which the RBI lends money to commercial banks is called repo rate. Due to this fine tuning of RBI using its tools of CRR. When the repo rate increases borrowing from RBI becomes more expensive. A reduction in the repo rate will help banks to get money at a cheaper rate. the repo rate in India is currently 8 % as of July 2011. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. to drain out the excessive money from the banks. they can borrow it from Reserve Bank of India or from other banks. the available amount with the banks comes down. The rate of interest on the . Repo RateWhen banks have any shortage of funds. Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man. If RBI decides to increase the percent of this. Banks will be able to borrow upto 1% of their respective Net Demand and Time Liabilities".[1].

 Alternative investments: The lender has a choice between using his money in different investments. rather than a form that takes time or money to realise. This means that a lender generally charges a risk premium to ensure that. The borrower needs to compensate the lender for this. 1%) above the repo rate.amount accessed from this facility will be 100 basis points (i. Since according to time preference theory people prefer goods now to goods later. most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation.  Liquidity preference: People prefer to have their resources available in a form that can immediately be exchanged.  Political short-term gain: Lowering interest rates can give the economy a short-run boost. he is compensated for those that fail. Under normal conditions.e. If he chooses one. across his investments. abscond. Reasons for interest rate change.  Risks of investment: There is always a risk that the borrower will go bankrupt. in a free market there will be a positive interest rate. or otherwise default on the loan. meaning a given amount of money buys fewer goods in the future than it will now. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.  Deferred consumption: When money is loaned the lender delays spending the money on consumption goods.  Inflationary expectations: Most economies generally exhibit inflation. Different investments effectively compete for funds. he forgoes the returns from all the others. die. .

How RBI rate hike impacts your financial life ? Few days back. Note that this article is limited in its scope by looking at the two changes from the point of view of its direct impact on a common man. more increase indicated: MUMBAI: Auto and home loans are set to get costlier as India‟s central bank Thursday hiked short term lending rates by 25 basis points in a bid to curb inflation and indicated that more such increases were in the offing. I will touch two most important changes that were recently disclosed by RBI and show you in simple manner how it‟s directly related to a common man. Do you want to know how you as an investor would get impacted with the recent changes done by RBI? I have seen that a common man always ignores this kind of news because it looks too complicated to him or he can‟t understand how his life will be affected by such fluctuations. In this article. . Note that this article is limited in its scope of looking at these two changes only from a viewpoint of how a common man is affected directly. Taxes: Because some of the gains from interest may be subject to taxes. RBI hikes Interest rate again. Let me quickly go through two main changes which RBI recently changed and explain to you how it impacts common man. the lender may insist on a higher rate to make up for this loss. there were some changes announced in repo rate and saving bank account interest rates by RBI.

the reverse repo rate stands automatically revised to 6. the Reserve Bank will need to persist with its anti-inflationary stance of monetary policy. .” Other policy rates such as the statutory liquidity ratio and the cash reserve ratio .96 per cent as recorded for the week ending June 4.66 per cent in the previous month. This is the tenth time the RBI has raised interest rates since March 2010. “Domestic inflation remains high and much above the comfort zone of the Reserve Bank. The RBI. The bank rate also remains unchanged at 6 per cent. compared to 8. the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory. Pranab Mukherjee. speaking in New Delhi on Thursday said the increase of 25 basis points in repo rate by RBI is a move to maintain an interest rate environment that moderates inflation and checks inflationary expectations. As per the structural changes announced in the monetary policy for 2011-12.” the RBI added.have been left untouched.The Reserve Bank of India (RBI) raised the repo rate by 25 basis points from 7. in the mid-quarter monetary policy review said.50 per cent with immediate effect. It also maintained the projection for gross domestic product growth for 2011-12 at around 8 per cent.06 per cent in May.” the central bank said. Latest data showed that annual inflation rose to 9.the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities . “Based on the current and evolving growth and inflation scenario. Signalling continuation of its hawkish monetary stance.5 per cent. The Finance Minister was reacting to Monetary Policy announcement by the central bank in which it has raised the repo rate by 25 basis points to 7.5 per cent. The central bank said that the current increase in repo rate would help “contain inflation and anchor inflationary expectations by reining in demand side pressures and mitigate the risk to growth from potentially adverse global developments. While the Reserve Bank needs to continue with its anti-inflationary stance. Food inflation too is hovering around a high 8. Meanwhile the Finance Minister. the RBI said it would persist with more rate hikes to contain inflation.25 per cent to 7.

So now what are the effects of it on a common man? Let‟s understand this concept.The cash reserve ratio (amount of funds that banks have to keep with RBI). In fact some banks like IDBI bank and Yes Bank have already increased their interest rate for loan takers.5% in repo rate. it will now increase to 10. this increase will directly be passed to a common man (in case of floating interest rates). This has direct impact on the EMI which you pay for your house. In fact.a.5% by RBI and is at 7. has been left unchanged at 6 per cent. So if your interest rate for home loan or Auto loan was 10% p.5% – 1. Now with the increase of 0. Now change in repo rate has a direct impact in the interest rates offered to customers for loans by the same or by more magnitude.50% at least. .0%. Increase in Repo Rate by 0. Chanda Kochar (Managing Director of ICICI Bank) has already said that this repo rate increase can increase the interest rates for end consumers in the range of 0. Banks offer loans like Home loans and Auto loans to someone at an interest rate which is directly proportional to Repo rate (interest rate for common man = repo rate + X %).75% to 7. however.25% right now.25%): Repo rate is a rate at which Bank borrows money from RBI.5% (6. which was increased by 0.

5 per cent since March 1. While the RBI had deregulated interest rates on fixed deposit schemes in 1997.RBI moots deregulation of savings bank interest rate: MUMBAI: The Reserve Bank of India (RBI) on Thursday made a pitch for deregulation of savings bank deposit rates. it continues to fix the rate on savings bank deposits. 2003. . saying that deregulation of interest rates on savings bank (SB) accounts would benefit savers. The interest rate on savings bank deposits has remained unchanged at 3. as it would enable lenders to come out with innovative products to attract more funds from low-income households.

International experience suggests that in most countries. imparted greater efficiency in resource allocation and strengthened the transmission mechanism of monetary policy. semi-urban and urban areas are responsive to interest rate changes in savings deposits.” The RBI said that deregulation of interest rates in India since the early 1990s has improved the competitive environment in the financial system.” the RBI noted. savings deposits in rural.As indicated in the second quarter review of Monetary Policy 2010-11 on November 2. Most countries in Asia experimented with interest rate deregulation to support overall development and growth policies. “Savings deposit interest rate can not be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system. the RBI released on its website a discussion paper on „Deregulation of savings bank deposit interest rate'. which in turn contributed to an increase in financial savings. “These resulted in positive real interest rates.” Savings deposit interest rate has not been deregulated for the reason that a large portion of such deposits are held by low-income households in rural and semi-urban areas. Beneficial to savers The empirical evidence suggests that unlike metropolitan areas. 2010. Deregulation of savings bank deposit interest rate also led to product innovations. “The only interest rate that continues to be regulated now is the savings deposit interest rate. . interest rates on savings bank accounts are set by commercial banks based on market interest rates.

Since savings deposit is a hybrid product. Monetary Policy Department. RBI ups key interest rates by 25 bps to tame inflation: Continuing its hawkish monetary stance to curb high inflation. “Deregulation will also allow banks to introduce product innovations which could also benefit the depositors. Central Office." said the RBI in the mid-quarter monetary policy review.25 percent to 7. the Reserve Bank of India (RBI) Thursday hiked short-term lending rates by 25 basis points. Deregulation will have another major advantage in that it will help improve the monetary transmission. the RBI has also sought feedback from the general public by May 20 to the Adviser-in-Charge. Central Office Building. “Since savings deposits constitute a significant portion of aggregate deposits. a market-based rate of interest on this product has the potential to attract large savings from low-income households. "The challenge of containing inflation and anchoring inflation expectations persists. Reserve Bank of India. In the light of pros and cons of deregulation of savings deposit interest rate as set out in the discussion paper.” the RBI stated. the RBI argues that market-based interest rate may be beneficial to savers. The repo rate was raised by 25 basis points from 7. 24th floor.5 percent with immediate effect. . regulation of interest rate on such deposits has impeded the transmission of monetary policy impulses.Therefore. the tenth time it has raised interest rates since March 2010. Mumbai-400001. which combines the features of current account and term deposit.

5 percent -. compared to 8. no evidence of any sharp or broad-based slowdown -.Repo rate hiked by 50 basis points to 7. Latest data showed that annual inflation rose to 9." the RBI added.have been left untouched. "While the Reserve Bank needs to continue with its anti-inflationary stance.the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities -. Highlights of mid-quarter review of RBI monetary policy: -.Baseline projection for GDP growth for 2011-12 maintained at around 8 percent -.Marginal standing facility rate increased to 8.As per the structural changes announced in the monetary policy for 2011-12. the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory.66 percent in the previous month.5 percent.06 percent in May. Other policy rates such as the statutory liquidity ratio and the cash reserve ratio -.Deceleration in some interest-sensitive sectors such as automobiles. The bank rate also remains unchanged at 6 percent.5 percent -.Domestic inflation remains high and much above the comfort zone of the Reserve Bank .No change in other statutory rates -.Reverse repo automatically revised upwards to 6.5 percent -. the reverse repo rate stands automatically revised to 6.

RBI will persist with its anti-inflationary stance of monetary policy -. suggests more generalised inflationary pressures -.RBI says rate hike will contain inflation by reining in demand side pressures and anchor inflation expectations -.-.Non-food manufactured products inflation is a matter of particular concern.Impact of the recent monetary policy actions is still unfolding -. .Although global commodity prices have moderate they still pose a risk to both domestic growth and inflation.RBI says actions expected to mitigate the risk to growth from potentially adverse global developments -.

as per the government data. textiles. The International Monetary Fund has already revised the growth projection of Asian countries.66 per cent during the last month. This high rise is driven by an increase in prices of manufactured goods such as edible oil. etc.06 per cent.48 per cent during the same period a year ago while it was 8. For 2011. India has seen its headline inflation in May rise to 9. the actual scenario shows the Reserve Bank and the Indian Finance Ministry has failed so far in controlling inflation. The RBI has in fact raised key policy rates nine times since March 2010. Though Finance Minister Pranab Mukherjee has repeatedly stated that the government is keeping a close watch on developments. The rise has made it evident that the Reserve Bank would once again go for another round of raising interest rates at its mid-quarterly review slated for June 16. forecasting a downward trend of Indian‟s growth. . As understood. paper products. th e IMF has projected India‟s growth to dip down to around 8% owing to high inflation and overall global economic turmoil created due to rising prices of commodity goods and oil.However it is mentionable that the wholesale price index (WPI) stood at 10.RBI mid quarterly review needs to change policy to control inflation: Mocking the repeated assurances of the Finance Minister of the country to control inflation. both domestic as well as international and that they are keen in taming down inflation. sugar.

More hike in interest rates.5 per cent. the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory. Food inflation too is hovering around a high 8. “Domestic inflation remains high and much above the comfort zone of the Reserve Bank. The central bank said that the current increase in repo rate would help “contain inflation and anchor inflationary expectations by reining in demand side pressures and mitigate the risk to growth from potentially adverse global developments.” the RBI added.66 per cent in the previous month. The Reserve Bank of India (RBI) raised the repo rate by 25 basis points from 7.96 per cent as recorded for the week ending June 4.06 per cent in May. All eyes are now on the mid-quarterly review of the RBI scheduled on June 16. India‟s central bank Thursday hiked short term lending rates by 25 basis points in a bid to curb inflation and indicated that more such increases were in the offing. compared to 8. It is an absolute necessity for the Reserve Bank of India to undertake additional policy changes to tighten its grip on the economy.the .25 per cent to 7.” Other policy rates such as the statutory liquidity ratio and the cash reserve ratio . The RBI. Latest data showed that annual inflation rose to 9. that too repeatedly in the last fiscal. This is the tenth time the RBI has raised interest rates since March 2010. While the Reserve Bank needs to continue with its anti-inflationary stance. As per the structural changes announced in the monetary policy for 2011-12.50 per cent with immediate effect.the lower growth projection of the country is due to RBI‟s step of excessive increase in interest rates. the reverse repo rate stands automatically revised to 6. in the mid-quarter monetary policy review said.

The RBI has continued its upward interest rate revision policy of the past one year by yet again hiking the interest rates by 50 basis points. The bank rate also remains unchanged at 6 per cent. The new repo rates are 8% and the corresponding reverse repo rate (1% lesser than repo rates) is 7%. It also maintained the projection for gross domestic product growth for 2011-12 at around 8 per cent. .93 per cent in April 2011.” the central bank said. Meanwhile the Finance Minister.minimum quantum of money against deposits which the banks have to retain as cash or specified government securities . speaking in New Delhi on Thursday said the increase of 25 basis points in repo rate by RBI is a move to maintain an interest rate environment that moderates inflation and checks inflationary expectations. The cash reserve ratio (amount of funds that banks have to keep with RBI). the RBI said it would persist with more rate hikes to contain inflation.have been left untouched. This in effect will mean that things are going to be costlier on the borrowing front.71 per cent in May 2011 in comparison to 7. Signalling continuation of its hawkish monetary stance. The Finance Minister was reacting to Monetary Policy announcement by the central bank in which it has raised the repo rate by 25 basis points to 7. Mr Mukherjee said that this was on expected lines. He said that there was a need to have better price stability for sustaining growth in the mediumterm. Pranab Mukherjee. the Reserve Bank will need to persist with its anti-inflationary stance of monetary policy.5 per cent. as the core inflation hardened to 8. “Based on the current and evolving growth and inflation scenario. has been left unchanged at 6 per cent. however.

the hike has been forced due to 2 major reasons 1.25%). food and everything! What does it mean for us in the following months? It is clear that the RBI is not keen on supporting growth without getting the necessary infrastructure in place.0% • Reverse Repo rate effectively raises to 7. Meaning that higher growth rates a not seen in the coming few months. soap. This means that loans have become costlier for you.0% • Marginal Standing Facility gets automatically adjusted to 9. Over the last one and a half year. the RBI has deemed it necessary to continue its anti-inflation policy and continue with raising interest rates. A continued rise in the prices of non-food manufactured products and the rising Crude oil prices 2. the extra income that you get will be compensated by the extra you have to shell out for gas.Here's a review of what is in store for the common man with the new changes. This policy stance of the RBI in the past one year has meant that on an average. Although it must also be seen that deposit rates have gone higher too. Thus. the RBI has raised the Cash Reserve Ratio (CRR) by over 100 basis points and the Policy rate by over 275 basis points. There is also considerable indication that business growth is moderating.0% each ( Here is a more detailed look at RBI's announcements) Why has the RBI hiked the prices? In the words of the Central Bank. Personal loan etc have all borne the blunt of this upward rise. The announcements: • Repo rate hiked to 8. Your housing loan. all banks/lenders have raised their deposit and Lending rates by over 225 basis points (2. It is clear from all its recent past communications that a major reason for inflation is the supply side inefficiency and it will do all that it can do on the . oil.0 % • Bank rate and CRR rate maintained at 6. Car loan. This in effect means that banks have to face a net effect pressure of around 425 basis points.

The monetary measures so far effected to arrest inflation have been ineffective. it said. The chamber has further requested RBI to instruct banks not to raise the interest rates for MSMEs in case of any hike in the key policy rates by the monetary authority next week to tame inflation. Small and Medium Enterprises were apprehensive about the quarterly review slated for July 26.monetary side to fight inflation tooth and nail and also manage/minimize the resulting negative effect on business growth." the statement said.ahead of the first quarter monetary policy review next Tuesday -not to effect any changes in the interest rate. . In a statement here.44 percent. leading to cost escalation. The RBI is also committed to ensuring that not all these policies result in a very negative effect on the liquidity situation. MSMEs are paying highest rate of interest. How will this pan out in the coming days? Loans will be costlier : A direct impact that can be felt in the coming few days is an inevitable rise in Interest rates charged by banks for their lending products including home loans and car loans. "Currently. pointing out that it has impacted MSMEs adversely. Small Industries want status quo on interest rate Thane. adding that any further hike would hit their competitiveness. leading analysts to believe that the RBI will go in for another bout of rate hikes in the Tuesday policy announcement. Prices will mostly stagnate in the medium term: in the immediate short term. Jul 20 (PTI) The city-based Chamber of Small Industries Association today urged the Reserve Bank -. as the consecutive 10 hikes in short-term lending rate (repo) in the past 15 months by the RBI had resulted in a steep rise in the lending rates by the banks. we may not see any major price changes in the day-to-day products we buy. June inflation stood at 9. there will be a stagnation of prices due to the anti-inflation measures that have been implemented in the last 20 months. chamber president M R Khambete said that Micro. in the mediumterm.

I do not think that is preventing new investments or slowing down working capital cycles. exogenous factors on commodity and energy prices and structural issues that we have on food supply and distribution. There is an impact of this with some gestation. it is a matter of another 3-4 months before we see a downward movement in inflation rates. talks about inflation. In this world of volatility. which could be between 6-6. Rana Kapoor . So as a bank and in terms of client expectations. So further adjustments of 25 basis points or 50 basis points are not going to shock the markets anymore. fragilities. Do you expect RBI to move aggressively again? Rana Kapoor: We are apparently almost at the end of rate hikes. Yes Bank . we are adjusted to the fact that another 0. We are convinced about a strong probability that inflation will come down to around 6-6. which is going to embed in the markets.Another 50 bps rate hike likely in next 3 months:   Yes Bank RBI In an interview with ET Now . policy rates and Yes Bank's margin outlook.5%. There is a new normal for inflation. Excerpts: ET Now: What's your sense on where we stand currently on the macro front in India? Inflation is in double digits.5%. When do you see inflation peaking out in India? Rana Kapoor: All the necessary monetary steps have been taken short of the fact that there may be some further rises in policy rates of about 0. That may not be detrimental for further investment and incremental capital formation in our country ET Now: The next credit policy is due on 26th of July. This cycle is a mere adjustment from moving out of quantitative easing to more normalised conditions and at the same time addressing the peculiar inflation formation despite the slowdown and the stagflation in the rest of the world. so the previous targets of 5% or so have become somewhat unrealistic. The way we appreciate the markets. we will find a new normal inflation. . MD & CEO. India has seen very high interest rates in the past.5%.5% rise could be around the corner in next three months.

is a pointer to another increase in the key repo rate. unveiled on the eve of the policy review on Tuesday. All 15 market participants polled by ET over the weekend were unanimous the central bank would raise repo rate by 25 basis points (1 bps is 0. The macro report said if the monsoon turns sub-normal. in what is being perceived in the financial markets as an indicator that the central bank is set to raise interest rates again on Tuesday. The report. The RBI has projected inflation to come down to 6% by the end of this fiscal. In its latest report on macro and monetary developments of the economy. Not only is the headline inflation still hovering around 9%. or RBI. or the rate at which the RBI lends to banks against government securities. Risk factors have emerged that could adversely impact aggregate demand. but its job is far from over with headline inflation still over 9%.01%).5%. according to the RBI's assessment. "Challenges from the policy perspective have become even more stringent with increased risks to growth.RBI set to raise key rates by 25 basis points today   Reserve bank of India Key rates MUMBAI: The Reserve Bank of India. Taming inflation is an unfinished task considering that price pressures still persist. upside risks to the projected moderation in inflation during the second half would go up. It also cautioned against a potential impact of the Eurozone crisis on the domestic economy. has said the broad thrust of monetary policy will have to be on tightening despite risks of slower growth. . though inflation is likely to remain high in near term." the report said. It has raised rates 10 times since March 2010 to cool inflation. the RBI said monetary policy would have to preserve its tight monetary stance till there is credible evidence of inflation trending close to a level within the central bank's comfort zone of 4-4. but non-food manufacturing inflation also remains significantly high at above 7%. it said.

0% • Reverse Repo rate effectively raises to 7. .0% each Effects of changes in interest rates by RBI. It is clear that the RBI is not keen on supporting growth without getting the necessary infrastructure in place. This in effect will mean that things are going to be costlier on the borrowing front. in the mediumterm. It is clear from all its recent past communications that a major reason for inflation is the supply side inefficiency and it will do all that it can do on the monetary side to fight inflation tooth and nail and also manage/minimize the resulting negative effect on business growth. Here's a review of what is in store for the common man with the new changes.New announcements of rise in interest rates.0% • Marginal Standing Facility gets automatically adjusted to 9. The RBI is also committed to ensuring that not all these policies result in a very negative effect on the liquidity situation. The announcements: • Repo rate hiked to 8. The RBI has continued its upward interest rate revision policy of the past one year by yet again hiking the interest rates by 50 basis points. there will be a stagnation of prices due to the anti-inflation measures that have been implemented in the last 20 months. we may not see any major price changes in the day-to-day products we buy. Prices will mostly stagnate in the medium term: in the immediate short term. How will this pan out in the coming days? Loans will be costlier : A direct impact that can be felt in the coming few days is an inevitable rise in Interest rates charged by banks for their lending products including home loans and car loans. The new repo rates are 8% and the corresponding reverse repo rate (1% lesser than repo rates) is 7%.0 % • Bank rate and CRR rate maintained at 6.

which in turn leads to greater profits and an expanding economy. Overall. their borrowings will get costlier leading to pressure on margins. they could see a hit on the sales side too. the unifying effect of an interest rate cut is the psychological effect it has on investors and consumers. in turn. or buying securities such as bonds. At the same time. Investors and economists alike view lower interest rates as catalysts for expansion. . they see it as a benefit to personal and corporate borrowing. a decrease in interest rates will prompt investors to move money away from the bond market to the equitymarket. leads to higher stock prices. A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money. Here's why. Although the relationship between interest rates and the stock market is fairly indirect. the two tend to move in opposite directions. which. it is wise. On one hand. to be aware of the potential effects behind such decisions. thereby increasing their future earnings potential. have a decreased opportunity to make income from interest. as a stock investor. businesses will enjoy the ability to finance expansion at a cheaper rate. If we assume investors are rational. What does a cut in interest rates mean for the stock market? When the next Federal Reserve meeting is expected to bring interest rate cuts or increases.Cars and home will be costlier : Already faced with many pressures due to external factors. these two industries will take a direct hit of the current hikes. and on the other hand since banks will charge more for loans.

then we have more actions left." NITESH RANJAN. "If the RBI is looking at sustained downtrend in core inflation before it takes a pause. "It is very likely that the tightening cycle will be continued as the central bank has clearly stated that a "change in stance will be motivated by signs of a sustainable downturn in inflation". ANUBHUTI SAHAY. stepping up its fight against persistently high inflation despite slowing growth in Asia's third-largest economy. the RBI should take a pause till November and wait to see the transmission impact of actions taken so far." . WPI inflation in our view is yet to peak out. The expected inflation trajectory for 12-month forward has not changed in recent times but the RBI's actions since May 2011 do not give clear sense on future course of policy rates. The RBI increased the repo rate. MUMBAI: "The RBI's action is more aggressive than expected and clearly highlights that inflation management is the priority for the central bank.Expert views on RBI rate hike. ECONOMIST. to 8 percent. The rate increase is its 11th since March 2010. exceeding market expectations that it would raise rates by 25 basis points. MUMBAI: "50 bps without any forward looking signal on end of cycle is quite surprising. ECONOMIST. The Reserve Bank of India (RBI) raised interest rates by a higher-than-expected 50 basis points on Tuesday. making the RBI one of the most aggressive inflation fighters among central banks. In my view. UNION BANK OF INDIA. STANDARD CHARTERED BANK. at which it lends to banks.

The rate increases have dented manufacturing activity and growth. adverse global environment suggests that it might become less aggressive. According to global research firm Macquarie economist Tanvee Gupta Jain. even though the global economic environment is on a downslide. BACKGROUND: . . . traders said. * The partially convertible rupee was mostly unmoved at 44. "While the RBI will continue on its anti-inflationary stance.40 percent immediately after the announcement. and the oneyear rate rose 17 basis points to 8.. while the Reserve Bank of India is likely to go for another interest rate hike at its next mid-quarterly policy review on September 16.4 percent to 18. Policymakers last week scaled back their economic growth target from 9 percent set . believe experts.66 percent." Market reaction on Reserve Bank of India rate hike.15 percent. * The benchmark five-year swap rate was up 8 basis points at 7.RBI likely to go for another rate hike in Sept: Experts The Reserve Bank of India is likely to continue with its tight monetary policy stance to fight inflation and effect another hike in key interest rates in September.605.6 percent in May.. is largely driven by domestic demand.India's economy. * The 10-year benchmark bond yield rose 8 basis points to 8. Industrial output rose 5.29/30 per dollar. However.18 points after the policy.The Reserve Bank of India (RBI) had raised policy rates by 275 basis points in 10 moves over 15 months to June to control stubbornly high inflation. its weakest pace in nine months. the experts said. Asia's third-largest. it will not be very aggressive. MARKET REACTION: * The 30-share BSE index fell 1.

70 percent rise in a Reuters poll. (Compiled by Swati Bhat. Reporting by Mumbai Treasury Team. The RBI projects it around 8 percent.Annual inflation quickened in June. with an upward bias.In its policy review in May. Editing by Ranjit Gangadharan . driven by higher prices of manufactured goods and fuel. India's main inflation gauge. . rose an annual 9.earlier.44 percent. with many private economists predicting below 8 percent in the fiscal year ending next March. the RBI projected headline inflation at 6 percent by endMarch 2012. The wholesale price index. . though below the median forecast for a 9.

Sign up to vote on this title
UsefulNot useful