RBI rate hike worries real estate sector

03 August, 2018, 14:15 | Author: Shannon Aguilar
  • The Bank of England’s monetary policy committee appears almost certain to raise interest rates this week

In the second bi-monthly monetary policy review announced in June, RBI had hiked the repo rate by 25 basis points to 6.25 per cent while maintaining a neutral stance.

A Bank rate rise does not guarantee the equivalent increase in interest paid to savers.

The one reason that may have prompted the RBI to hike interest rates is the core inflation, which has been on a upsurge. But the same market on August 1 slipped 85 points even though commentators said the second rate hike was on "expected lines".

State Bank of India (SBI) on Tuesday raised its fixed deposit rates by up to 10 basis points, ahead of the monetary policy announcement.

The RBI today increased repo rates by 25 basis points to 6.5%, the second hike in two months, making housing and automobile loans costlier. That was the first increase since January 28, 2014 when rates were hiked by a similar proportion to 8 percent.

Meanwhile, reverse repo, the rate at which the central bank borrows money from commercial banks within the country, was adjusted to 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent. "Three MPC members had dissented at the last BoE meeting, including Chief Economist Andrew Haldane, and key data releases since June, such as a healthy labour market report, will have strengthened the resolve of other Committee members".

In the subsequent years, RBI cut the interest rate on six occasions.

In the shorter term, the Bank Rate implied by a so-called equilibrium real interest rate, or "r*", was likely to be somewhat lower, the BoE said, without giving a precise estimate.

"Every saver now has their fingers crossed that this latest base rate rise may go some way to returning rates to those levels, but like last time, providers are likely to be slow to react and choosy with their increases".

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Five members of MPC - Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel voted in favour of the decision while Ravindra H Dholakia voted against the decision.

Global crude oil prices have surged almost 20 percent this year and crossed $80 a barrel in May, their highest since 2014.

The Royal Bank of Scotland, NatWest and Ulster Bank North base rate has also increased from 0.5 per cent to 0.75 per cent.

The Bank of England raised its benchmark interest rate to the highest level since 2009 in what may be its final blow against inflation before the United Kingdom leaves the European Union.

It also expects GDP to grow by around 1.75% per year on average which, "although modest by historical standards", is slightly faster than the diminished rate of supply growth.

The rate hike comes on back of rising retail inflation concerns.

"Although underlying tone of RBI statement appeared balanced, inflationary risks and outlook highlighted by the central bank indicates hawkishness".

The U.S. Federal Reserve held short-term interest rates in the U.S. steady Wednesday but is expected to raise them again next month.

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