Kodomut
With inflation remaining the core issue, the apex bank has today decided to hike its key policy rates by 25 basis points once again in its second quarterly review for 2010-11. In a span of 1 year, the RBI has hiked the cash reserve ratio (CRR) by 100 basis points and the repo and reverse repo rates by 125 basis points and 175 basis points, respectively. Though RBI has been aggressive on curbing inflation, it has taken a stance not to disrupt the growth story of India Inc.
The food inflation stands at 13.75% for the week ended October 16 despite being a good monsoon. This is because non-cereal items like milk, eggs, fish and meat are less responsive to monsoon. Key policy rates viz. repo rate and reverse rate have therefore been increased to 6.25% and 5.25% respectively. The spread between repo and reverse repo was retained at 100 basis points. CRR and Bank rate has not been increased from its current level of 6%. So, how would the policies impact your household expenses, housing loans, car loans and personal loans? Read through this article to know more!
Impact on household expenses and borrowers
- Banks might increase the base rate keeping in view of the consistent increase of policy rate viz. repo rate and reverse rate by RBI. This increase has been in line with the expectations of bankers. This is in turn lead to an increase in your housing loan rate, car loan rate and personal loan rate.
- The continuing inflation is a matter of concern for exporters. However, consistent increase of policy rates by RBI will ensure that exporters heave a sigh of relief in the months to come. As the monetary transmission takes a while to trickle down and hence impact the overall economy, the exporters will get a much better market by next quarter.
- As there is liquidity crunch in the market, the operating rate of banks will continue to be the repo rate.
- Increase in the repo rate and reverse rate will be good news for depositors as banks will hike the deposit rates before they take a call on the lending rates linked to base rate.
- The impact of increase in key policy rates will have similar impact for education loan as well. There was a proposal from the Government to cap the education loan at 2% over and above the base rate. This move could substantially reduce the funding cost for students. However, the time frame required to make this a policy is still in question.
- Spread between repo and reverse repo was reduced by 25 basis points in the last mid term review. This will further bring stability in financial market.
- The stock market is not going to witness much uncertainty as the policy hikes are not a surprise to the investors. In the short run, 5,950 mark on the Nifty seems to have a strong support level and any fall should be used as a buying opportunity.
The way ahead
The RBI has taken these steps keeping in view the worsening current account deficit, worsening exports and appreciating currency. However, it is still questionable if the policy hikes will contain inflation in the long run. This is because of the fact that inflation currently is not only a result of demand side pressure but also a result of the supply side constraints. This means the higher price is due to the lack of availability and not due to excess consumption. Therefore, an increase in policy rates at this point should well be supplemented by appropriate fiscal measures to curb both the demand and supply side inflation. Once the supply side inflation (primarily food inflation) tapers off, the overall inflation can then be easily reined in. Till then, consumers and borrowers will continue to face the heat of rising inflation!