After a pause in December, the Reserve Bank of India (RBI) on Tuesday once again raised its key policy rates by 25 basis points (bps) each to make money more expensive and contain rising inflation in the world’s second fastest growing major economy, even as it cautioned banks to moderate their loan growth.
The latest round of hikes, the seventh this fiscal, will take the repo and reverse repo rates, or the rates at which the central bank lends and accepts funds from banks, to 6.5% and 5.5%, respectively.
Analysts and economists expect further hikes in the next few months as inflation continues to be a risk to the economy and far higher than the central bank’s annual projection. RBI, in fact, has raised its baseline Wholesale Price Index-based inflation projection for the fiscal ending March to 7% from 5.5%.
The average inflation rate in the first nine months of this fiscal has been 9.4%.
Despite the rate hike, bond prices rallied and the yield on the most-traded 11-year paper fell to 8.20% by the end of trading on Tuesday, from 8.24% before the policy announcement. Bond prices and yield move in opposite directions.
Bond dealers said the market is happy as RBI has made clear its intentions that any rate hike will be gradual and the outlook is clear.
The equity market, however, did not cheer the policy. The Bombay Stock Exchange’s benchmark Sensex index ended down 0.95%, after rising immediately when the policy was announced.
The 14-share Bankex, an index of bank stocks, closed 2.34% down, with ICICI Bank Ltd, the largest private sector lender, losing the most at 4.1%.
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