Loans may cost more

Third quarter review of monetary policy

• Slowdown getting increasingly worrisome
• Growth likely to slip below 5 pc in 2013-14
• No pick-up in manufacturing sector
• Rate hike will set economy on disinflationary path
• Cash reserve ratio kept unchanged at 4 per cent
• Current Account Deficit to be below 2.5 pc this fiscal
• Inflation falling hardest on the very poor
• Review every two months; Next review on April 1

Mumbai: EMIs for home and auto loans may rise as Reserve Bank Governor Raghuram Rajan unexpectedly raised a key policy rate by 0.25 per cent on Tuesday to fight inflation.

The RBI, in its Third Quarter Review of Monetary Policy, increased the short-term lending (repo) rate to 8 per cent from 7.75 per cent and indicated a pause in terms of further rate hikes.

The central bank lowered its growth forecast for the current financial year to less than 5 per cent from 5.5 per cent and said inflation will continue to hover around 8 per cent in the next fiscal.

"...An increase in the policy (repo) rate by 25 basis points is needed to set the economy securely on the recommended disinflationary path," Rajan said. Consequently, the reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent.

However, the RBI kept the cash reserve ratio unchanged at 4 per cent as liquidity seems to be comfortable. It was widely expected that Rajan would maintain the status quo on rates to support growth. Ahead of the quarterly review, Rajan had termed inflation a "destructive disease."