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Last updated: 07 Aug, 2018  

RBI.Thmb.jpg RBI rate hike

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Bikky Khosla | 07 Aug, 2018

Citing upside risks to inflation, the Reserve Bank of India (RBI) last week raised the policy repo rate by 25 basis points to 6.5 percent. This back-to-back interest rate hike for the first time in almost five years is also in the background of Rupee depreciation and high oil prices amid rising trade protectionism and geopolitical tensions. The rate hike has come on expected lines for the industry, but concerns also followed the decision over its possible impact on interest rates on loans.

The factors that led to the RBI decision are clear. First, as mentioned above, relative weakness of the Rupee -- this year, the currency has already lost over 8 percent of its value. Second, there is concern over the mounting inflation risk, especially core inflation. It is widely agreed that uncertainty over domestic inflation needs to be carefully monitored. Third, the sharp hike in MSP recently may fuel inflation in coming days. Other factors include loose fiscal policies, farm loan waiver decision by some states and high crude prices.

RBI considers inflation control as one of its major objective and the last week hike only reflects its caution. But the decision has raised concern among several industrial sectors. Most significantly, the realty sector fears that the hike will impact housing sales further. Similarly, auto sales are likely to be hit directly. At the same time, I think the impact will be no less harmful on our SME exporters. At a time of unfavourable condition in our major markets, tight liquidity conditions may further impact the sector.

Amid these concerns, some experts are of the view that export finance should be placed under priority sector lending. Last month, the Union Commerce Minister said that his ministry was talking to the Finance Ministry and the RBI in this regard. He even raised the question – “how do you say priority of India is export when it is not a priority for lending?”. The argument sounds good, particularly at a time when a tight monetary policy seems inevitable to rein in inflation.

I invite your opinions.

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RBI rate hike
vivek natu | Wed Aug 8 06:51:59 2018
Loss of currency value has forced RBI to take decision.OK.It has no other option and has to consider india as a whole and not a particular sector. Here real challenge is to achieve gain in rupee value. And to get rise in value of Rupee india has make debt reduction as primary agenda and should quickly work at it. Secondly low rupee value is increasing the inflation as import cost increases.One has to pay more. Increased import cost is forcing industrial sector to find alternative cheap sources resulting in compromising with the quality of the product.Rate cut ,rate hike are temporary measures. Actually RBI should take a initiative to reduce the world bank debt and increase the rupee value. If this happens it will be long term beneficial. With high rupee value RBI would be able to raise interest rate on deposits. This may reduce the gap between lending rate and interest on deposit. Peoples purchasing power will improve.They will start buying more quality products than finding cheap poor quality alternative. Wide gap 5% between interest on deposits and lending rates has resulted in slow down in the market. RBI should take concrete steps to reduce the debts and increase Rupee value .

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