Repo rate, CRR hiked to check inflation

In a somewhat surprise move, the Reserve Bank of India (RBI) dealt a double blow to the markets in the continued fight against inflation. The central bank increased the repurchase rate (repo rate) and the CRR by 50 basis points each. While the repo rate was hiked to 8.5% with immediate affect, the CRR will go up in two stages - on July 5 (to 8.5%) and on July 19 (to 8.75%).

Expect lending rates on everything from home loans to auto, consumer and corporate loans to increase. Quite a few banks, including SBI, raised their Prime Lending Rates (PLR) by 50 bps. Some banks also increased their deposit rates, which will still be in the negative zone with inflation soaring to a fresh 13-year high of 11.42%. Other banks and housing finance companies are likely to take a call on rates over the next few days.

As far as markets are concerned, the move was a bit unexpected, as only on Monday the RBI Governor Y.V. Reddy had sought to allay fears of a swift reaction from the central bank in the wake of the steep increase in inflation. He even hinted that economic growth may not be hit afterall due to the series of monetary tightening measures. So, a sudden turnaround in the RBI's stand did smack of some kind of political pressure from North Block.

The stock market continued its downward spiral while bond prices tumbled, with their corresponding yields rising sharply. Shares in the rate-sensitive sectors like banking, real estate and auto were the hardest hit. Stocks in capital goods, construction, cement, retail and consumer-oriented sectors also came under pressure amid concerns over further slowdown in the economy. The rupee touched a three-week high, but retreated after crude oil nearly breached US$142 a barrel.