Take heart! No interest hike for now

Take heart! The interest rate on your home loan is unlikely to rise in the immediate future.

In a clever balancing act, the Reserve Bank on Tuesday hiked the repo rate by 0.25 per cent, while keeping reverse repo rates unchanged.

The RBI's mid-term monetary policy review ensured that key interest rates remain unchanged. This will maintain stable commercial lending rates, including that of home loans, to keep the growth momentum alive.

The repo rate is the rate at which the RBI borrows from the banks while the reverse repo rate is the rate at which the RBI absorbs overnight liquidity from the banking system.

Announcing the monetary policy review, the Central bank however kept the Cash Reserve Ratio stable at 5 per cent and bank rate remained unchanged at 6 per cent. The targeted inflation range has also been kept unchanged at 5 - 5.5 per cent while the GDP growth forecast has been revised to 7.5 - 8 per cent.

At the same time, RBI Governor Y V Reddy took a small step to contain inflation, now hovering at over 5 per cent, by hiking repo rate (overnight rate) at which RBI buys securities from banks to 7.25 per cent from the earlier 7 per cent.

Normally, the reverse repo and repo rates maintain a 100 basis points spread between each other which has now been increased to 125 basis points. The RBI has retained the flexibility to conduct overnight repo or longer term repo including the right to accept or reject tenders under the LAF, wholly or partially.

Most bankers across the spectrum had predicted that the RBI Governor won't raise rates in the mid-term monetary policy. What seems to have prompted the rate hike by the RBI is that fact that despite a marginal slowdown, bank loans are still growing at nearly 29 per cent and these are only likely to pick up now that the monsoons are over and the busy season starts.

Inflation soared past the 5 per cent mark in September after the economy expanded at a faster than expected rate of 8.9 per cent in April-June 2006.

Source: IBNLive.com