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Reserve Bank Hikes Interest Rates

Posted Date: 25-Jan-2011	Category: Banks
Author: Joseph Antony	Member Level: Gold	Points: 10 (Rs 5)

Reserve Bank of India, after the Q3 review, hiked repo and reverse repo rates to 6.5% and 5.5% respectively. RBI measure is aimed at curbing inflation. This will make loans dearly as banks are likely to increase interest rates for their loans.

Reserve Bank Hikes Repo / Reverse Repo Rates

Reserve Bank of India, after reviewing the Q3 performance of the economy, decided to increase repo rate to 6.5% and reverse rep rate to 5.5%. Prior to this, these rates were 6.25% and 5.25% respectively. Reserve Bank expects the GDP to grow by 8.5% in the current financial year.

RBI measure is aimed at taming inflation, which was 8.43% in December. The central bank wants to bring down the inflation rate to below 7% by March.

What is Repo Rate?
When banks face shortage of funds, they borrow money from the RBI. The interest that RBI charges on this money is called Repo Rate.

What is Reverse Repo?
During slack season, banks can deposit their surplus funds with the RBI. Reserve Bank pays an interest on this money. This rate is the reverse repo rate.

Impact
Banks will hike interest rates on various loans, and this means increased interest costs for the common man. Housing loans, Vehicle loans, and Consumer loans will become dearly.

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