RBI may hike rates again, loans to get costlier

Mumbai: The Reserve Bank of India (RBI) is widely expected to again hike key policy rates on Tuesday to curb stubbornly high inflation. The 13th hike since March 2010 will make home and auto loans costlier and put further pressure on economic growth.

With food inflation entering double digit figures and headline inflation almost touching the mark, most analysts feel the central bank would increase repurchase rate by 25 basis points to 8.50 per cent.

In its second quarter review of monetary policy of 2011-12 on Tuesday, the RBI is also likely to cut its GDP growth forecast to 7.5 per cent from 8 per cent.

The RBI has hiked key policy rates 12 times since March 2010 to control inflationary pressure. However, that hasn't helped in bringing down inflation much.

The central bank hiked repo and reverse rates by 25 basis points each to 8.25 per cent and 7.25 per cent respectively in September.

Food inflation rose sharply to cross double digit levels at 10.6 per cent for the week ended October 8 as against 9.32 per cent in the previous week. The headline inflation based on the wholesale price index was recorded at 9.72 per cent in September, according to the latest official data.

Inflation has remained almost near double digit since January 2010, despite an aggressive monetary tightening by the central bank and the claims of a series of fiscal measures by the government.

However, the rate hike has shown its negative impact on the economic growth. Industrial production has slowed down considerably in the past few months. It was registered at a sluggish 4.1 per cent in August rising a bit from the 3.8 per cent seen in July – lowest in almost two years.

GDP growth slowed to 7.7 per cent in April-June period, the weakest in six quarters.

With rising cost of inputs and high interest rates, industrial output is likely to remain subdued in the coming months.

According to a recent survey by the Confederation of Indian Industry, business confidence, especially among smaller firms, has declined in recent months.

The CII's quarterly business confidence index has declined by 2.5 per cent in the third quarter of 2011-12 as compared to the previous quarter.