The RBI announced a hike in the repo rate (its main policy rate at which it lends to banks) to 8.25%, even as its monetary tightening appears to have not yielded the results it is looking for so far. The reverse repo rate (at which banks park their funds with the RBI) has also been raised by an equivalent amount to 7. %.
With this hike, the policy rate has been increased by a total 325 basis points in one and a half year. The hike in policy rates which will lead to higher lending rates, has already affected the housing and automobiles loans business as well as credit off-take by industry, which is seeing a slowdown in sales. This had prompted expectations that the central bank would take a pause.
But the central bank said it was too soon to ease its anti-inflationary bias. "A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said.
Headline inflation for August rose to 9.78%, its highest in more than a year, from 9.2% in the previous month. However, the effect of previous rate hikes is likely to be felt in the forthcoming quarters, economist say, which could lead to the central bank stepping back.
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