RBI hikes repo rate by 0.25%; deregulates savings account interest

As was widely expected, the Reserve Bank of India today raised the repo rate (at which it lends short-term funds to banks) by 25 basis points 0r 0.25 per cent to 8.5 per cent.

This could prove something of a damper in the festive season, as car and home loans will become costlier – though the State Bank of India, the country's largest lender, has already signalled last week that it would not pass on any further RBI rate hikes to consumers.

The rate hike is the 13th in 18 months, aimed at tackling inflation that has been at near-record highs for well over a year. But many economists suggest that the rate hikes have not helped ease inflation, even as they dampen industrial growth.

The reverse repo rate, which is 1 per cent lower than the repo rate, now stands at 7.50 per cent. The cash reserve ratio (CRR) - the amount of funds that the banks have to keep with RBI - remains unchanged at 6 per cent.

The RBI said in its quarterly policy review released today that it would try to avoid further rate increases as it expects the high inflation to ease beginning December.

Announcing the policy in Mumbai, RBI governor D Subbarao said that it was necessary to persevere with anti-inflationary stance, as the impact of past policy actions is still unfolding.