Mumbai: The Reserve Bank of India (RBI) on Tuesday hiked its overnight lending and borrowing rates by 0.25% each, in line with market expectations, to cool off the high inflationary pressures.
The RBI hiked the repo rate, at which it lends short-term funds to banks to 6.25 % and reverse repo rate, at which it sucks out excess money from the system, to 5.25% with immediate effect.
So far this fiscal, the apex bank has increased its policy rates six times including today’s hike.
The apex bank, however, left the cash reserve ratio or the amount at which banks have to park deposits with the apex bank for zero interest unchanged at 6 %.
It has increased the repo rate by 150 basis points to 6.25 and reverse repo by 200 basis points to 5.25 % to fight inflation. One basis point is one hundredth of a percentage point.
Inflation, as measured by the wholesale prices, has been hovering in double digits for five months since February but has started easing since July
Though inflation measured by wholesale prices has fallen from its April peak of 11.23% to 8.6 % in September, it is still above RBI’s FY 11 target of 6 %.
The market had already discounted a 25 bp hike in key rates. The benchmark Sensex was trading 23.20 points down at 20331.43 points.
The most-traded 12-year government bonds and the rupee were little changed. The yield on the 8.13% note due 2022 was at 8.06% as of 11:33am, according to the central bank’s trading system. The rupee was at 44.37 per dollar, according to data compiled by Bloomberg.
With a view to prevent over leveraging in the housing sector, the RBI stipulated that the loan-to-value ratio (LTV) for housing loans should not exceed 80% and also increased the risk weight for residential loans of Rs75 lakh and above to 125%, irrespective of the LTV ratio.
Noting that teaser rate loans--the practice of banks offering loans to borrowers at lower rate in the first few years and hike the rate thereafter--the RBI also increased the standard asset provisioning by commercial banks for all such loans to 2%.
Following the announcement, realty Index dropped 2.15% to 3660.22 points while banking rose 0.2% to 14519.72 points. Shares of realty players like DLF Ltd, Unitech Ltd, and HDIL were seen falling.
Realty stocks like DLF Ltd dropped 2.2% to Rs.353, Unitech Ltd dropped 2.8% to Rs.86.7 and HDIL dropped 0.96% to Rs.251.5 and Indiabulls Real Estate dropped 2.95% to Rs.193.8, HDFC dropped 0.85% to Rs703, DHIL dropped 0.6% to Rs314.