The Reserve Bank of India guv Rajan surprises with policy rate hike; home loan EMIs may go up

In an unexpected move, the Reserve Bank of India (RBI) on Tuesday raised the repo rate – its key lending rate – by 0.25 percentage points to 8%, raising fears of yet another rise in home loan EMIs.

The surprise hike in the benchmark lending rate came in despite lower inflation rates in December. The central bank cut its growth forecast to less than 5% for 2013-14, but placed its bets firmly on the turnaround in the broader economy in the next financial year.

“If policy actions succeed in delivering the desired inflation outcome, real GDP growth can be expected to firm up from a little below 5 % in 2013-14 to a range of 5 to 6 % in 2014-15, with risks balanced around the central estimate of 5.5%,” said RBI governor Raghuram Rajan.

The central bank, however, made it clear that any action on interest rate movements will be determined by future price data.

Equity markets reacted sharply with the benchmark Sensex falling by over 100 points shortly after the RBI’s announcement.

Higher borrowing costs may hit consumers squeezed by high prices, flat salary hikes and costly mortgage financing rates.

The RBI’s latest move, however, will likely draw strong reactions from business leaders who have been clamouring for an interest rate cut arguing that costly borrowing and high raw material costs have crimped expansion and hiring plans.

Experts said Tuesday’s hike in lending rates could be the last in the foreseeable future given the inflation rates have shown signs of slowing down.

India’s wholesale inflation rate eased to a five-month low of 6.16% in December on lower vegetable prices, giving the United Progressive Alliance government some reason to smile as it battles to help the economy fight through a period of low growth and high prices ahead of crucial national elections.

Retail inflation – a more realistic index as it captures shop-end prices – also grew at a three-month low rate of 9.87% in December, from 11.16% in the previous month as fresh seasonal arrivals pushed down vegetable prices.

“I think this (Tuesday’s hike) could be the last in the series of rate hikes,” said C Rangarajan, chairman of Prime Minister’s Economic Advisory Council.