The Reserve Bank surprised everyone from investors to corporate leaders on Tuesday with a higher-than-anticipated hike in interest rates. What’s more, it made it clear the hawkish monetary stance would continue until inflation eases. RBI hiked the repo, which is its short-term lending rate, by 50 basis points to 8%. And the reverse repo, the rate at which it drains liquidity, is now at 7%. This is the eleventh time RBI has increased rates since March of last year. Many banks say they’ll be forced to pass on the hikes to their customers. And at least one of them, Yes Bank, has already increased its base rate by half a percentage point.
The Reserve Bank’s latest tightening is based on expectations of continued growth accompanied by rising inflation. RBI maintained its projection for GDP growth at 8%. But raised its baseline projection for inflation from six-plus-percent to 7%. The Reserve Bank has said its biggest worry is so-called core inflation, which doesn’t count food or fuel. At last count, India’s core inflation was 7.2%.
Switching gears, Maruti Suzuki’s first quarter earnings have overtaken expectations. The numbers came despite an industry-wide slowdown in car sales, thanks in part to those rising interest rates. The company’s net profit increased 18% to Rs549 crore. And sales went up 3.3% to Rs8,320 crore.
Despite the better than expected performance, Maruti’s first quarter earnings may not be sustainable. The company’s net profit includes a full 180 crores of other income, compared to just Rs100 crore in the same period last year. Shares of the firm declined 0.32% on the BSE to eleven hundred and 78 on a day the Sensex lost 1.87%.
Indian markets got hammered on Tuesday after the Reserve Bank’s greater than anticipated monetary tightening. The Sensex went into freefall, losing 353 points to end at 18,518. And the Nifty plunged 105 to 5,575.