RBI raises key rates by 50 bps : Industry View

The RBI on Tuesday raised key interest rates for the ninth time since March 2010 by a larger-than-expected 50 basis points as it battles persistently high inflation.

KEY POINTS:

- Repo rate, the short-term lending rate, up 50 basis points at 7.25 percent.

- Reverse repo rate, the short-term borrowing rate, up 50 basis points at 6.25 percent.

- Cash reserve ratio, the level of deposits that commercial banks must keep with the central bank, unchanged at 6.0 percent.

According to the new policy format, the central bank has introduced an additional facility-Marginal Standing Facility (MSF)--for banks to borrow from it. Under it, banks would be permitted to borrow short-term funds from RBI up to one per cent of their deposits at 8.25 per cent, with effect from May 7.

"The reverse repo rate will continue to be operative but it will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo will no longer be an independent variable," Subbarao said.


Views of Industry Officials against The Policy:

T.V. SANDEEP REDDY, MD, GAYATRI PROJECTS LTD

"The immediate impact will be that cost of BOT (build-operate-transfer) projects will go up, as BOT projects are tied up to interest rates. We don't know by what percent interest rates would go up, as it depends on hikes in rates by banks. We will have wait and watch."

BHARAT MODY, CFO, ACKRUTI CITY

"The 50 basis point hike is steep, everyone was expecting 25 basis point hike. This will result in an increase in loan rates to builders, and we will have to wait and watch on whether the banks decide to pass it on or banks decide to absorb (the hike).

This will not immediately impact real estate prices as they are decided by market conditions."

H.M.BHARUKA, MANAGING DIRECTOR, KANSAI NEROLAC

"This increase is going to hurt the industry. It is hurting the housing and auto sector and it is already having an impact on the paints sector. The problem the government is trying to tackle is inflation but raising rates is not the solution."


D.S. KULKARNI, CMD, D S KULKARNI DEVELOPERS

"We, as a real-estate industry, have developed a habit of receiving some shock every day and this one was expected. The rate hike would obviously have certain impact on the sector. As it is, nationalised banks are not supporting the construction industry but housing loan segment would see a major impact."

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Market near day's high after RBI's rate hike

In a bid to clamp down on resurgent inflation, the Reserve Bank of India, in its first monetary policy review of 2011, raised repo and reverse repo rates by 25 basis points to 6.5% and 5.5%, respectively. This is in line with street expectations. It also warned that higher food prices could become entrenched if steps to boost output are not taken. In accordance to a CNBC-TV18 poll of bankers and economists, the cash reserve ratio (which is the percentage of their deposits that banks must keep with the RBI as cash) and statutory liquidity ratio (SLR) have been left unchanged. Thus, CRR and SLR continue to stand at 6% and 24%, respectively.

Voicing a similar opinion, Ambareesh Baliga, vice-president of Karvy Stock Broking, says, "The rate hike decision is in line with our expectations. But looking at their revised inflation projections and the RBI report that came in yesterday, we can expect another 25 basis point hike in some time." Calling it a well-balanced policy, Deven Choksey said it intends to tempt inflation without compromising growth of economy.

A bout of volatility was witnessed in mid-morning trade after Reserve Bank of India (RBI) hiked reverse repo rate and repo rate by 25 basis points each at a quarterly policy review today, 25 January 2011. Most interest rate sensitive banking stocks edged higher after the RBI also extended some measures to ease cash crunch in the banking system. Index heavyweight Reliance Industries held firm. PSU OMCs gained as crude oil prices declined. IT stocks rose. The market breadth was strong. the BSE 30-share Sensex was up 124.65 points or 0.65%. The market edged higher in early trade on firm Asian stocks. The market extended gains to hit fresh intraday high in morning trade. The market extended gains soon after the RBI announced a hike in key policy rates at about 11:30 IST. The market instantly came off highs only to bounce back immediately thereafter. As per provisional figures, foreign funds bought shares worth Rs. 63.95 crore and domestic funds bought shares worth Rs. 236.51 crore on Monday, 24 January 2011. Foreign funds have dumped shares worth a net Rs. 5897.95 crore this month, as per data from the stock exchanges, with most of their selling absorbed by domestic funds. Domestic funds have bought shares worth a net Rs. 4573.05 crore this month.

The near-month January 2011 derivatives contracts expire on Thursday, 27 January 2011. The stock market remains closed on Wednesday, 26 January 2011 on account of Republic Day. The results announced so far showed the combined net profit of 381 companies rose 21.8% to Rs. 38895 crore on 21.8% rise in sales to Rs. 38895 crore in Q3 December 2010 over Q3 December 2009. Asian stocks rose on Tuesday, 25 January 2011 as US takeovers, share buybacks and dividend prospects drove the Dow Jones Industrial Average to its highest close since June 2008. The key benchmark indices in Hong Kong, Indonesia, Japan , Singapore and South Korea rose by between 0.05% to 1.63%. The key benchmark indices in China and Taiwan fell by between 0.23% to 0.8%.

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