Recent Changes In Interest

Rate Of R.B.I.




S.Y.B.M.S (B)
DETAILS:-

GROUP MEMBERS:-

Karishma Koli - 105
Mandar Bhoir 113
Chandresh Bhanushali - 114
Swapnil Shinde 115
Jatin Mane 116
Anand Kobnak 117
Gaurav Sharma 120


PROJECT SUBJECT: - Recent Changes In Interest Rate Of
RBI

CLASS: - SYBMS DIV :- B

SEM III


Acknowledgement



We take this opportunity to express our sincere gratitude
towards all those who directly and indirectly assisted us
in creating our project.

We are thankful to Prof. who provided
an opportunity to make a project. His supportive nature
and technical assistance made us comfortable at every
step.




Index


Introduction
What does Mean By Interest rates ?
Types of interest rates
Reasons for interest rate change
How RBI rate hike impacts your financial life
RBI hikes Interest rate again, more increase indicated
Increase in Repo Rate by 0.5%
RBI moots deregulation of savings bank interest rate
RBI ups key interest rates by 25 bps to tame inflation
Highlights of mid-quarter review of RBI monetary policy
RBI mid quarterly review needs to change policy to control inflation
More hike in interest rates
Small Industries want status quo on interest rate
Another 50 bps rate hike likely in next 3 months:
RBI set to raise key rates by 25 basis points today
Market reaction on Reserve Bank of India rate hike
Effects of changes in interest rates by RBI
What does a cut in interest rates mean for the stock market?
Expert views on RBI rate hike
New announcements of rise in interest rates


Introduction:-
The Reserve Bank of India was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934. Though initially RBI was privately
owned, it was nationalized in 1949. Its central office is in Mumbai where the Governor of
RBI sits. RBI has 22 regional offices and most of them are located in state capitals. The
Reserve Bank of India also has three fully owned subsidiaries: National Housing Bank
(NHB), Deposit Insurance and Credit Guarantee Corporation of India (DICGC), Bharatiya
Reserve Bank Note Mudran Private Limited (BRBNMPL).

The functions of Reserve Bank are governed by central board of directors. The board is
appointed by the Government of India. The directors are nominated / appointed for a
period of four years. As per the Reserve Bank of India Act there are Official Directors and
Non-Official Directors. The Official Directors are appointed by the government and
include Governor and Deputy Governors of RBI. There cannot be more than four Deputy
Governors. Non-Official Directors are nominated by the government. These include ten
Directors from various fields and one government official. Apart from these, there are
four other Non-Official Directors, one each from four local boards in Mumbai, Kolkata,
Chennai and New Delhi.

What does Mean By Interest rates ?

An interest rate is the rate at which interest is paid by a borrower for the use of money
that they borrow from a lender. For example, a small company borrows capital from a
bank to buy new assets for their business, and in return the lender receives interest at a
predetermined interest rate for deferring the use of funds and instead lending it to the
borrower. Interest rates are normally expressed as a percentage rate over the period of
one year.
Interest rates targets are also a vital tool of monetary policy and are taken into account
when dealing with variables like investment, inflation, and unemployment.

Types of interest rates;

Repo Rate-
When banks have any shortage of funds, they can borrow it from Reserve Bank of
India or from other banks. The rate at which the RBI lends money to commercial banks is
called repo rate, a short term for repurchase agreement. A reduction in the repo rate will
help banks to get money at a cheaper rate. When the repo rate increases borrowing
from RBI becomes more expensive.[1]. the repo rate in India is currently 8 % as of July
2011;

Reverse Repo Rate-
Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from
banks. Banks are always happy to lend money to RBI since their money are in safe hands
with a good interest. An increase in Reverse repo rate can cause the banks to transfer
more funds to RBI due to this attractive interest rates. It can cause the money to be
drawn out of the banking system.
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse
Repo rate our banks adjust their lending or investment rates for common man.

CRR Rate in India-
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If
RBI decides to increase the percent of this, the available amount with the banks comes
down. RBI is using this method (increase of CRR rate), to drain out the excessive money
from the banks.

Marginal Standing Facility Rate : Under this scheme, Banks will be able to borrow upto
1% of their respective Net Demand and Time Liabilities". The rate of interest on the
amount accessed from this facility will be 100 basis points (i.e. 1%) above the repo rate.
This scheme is likely to reduce volatility in the overnight rates and improve monetary
transmission.

Reasons for interest rate change;

Political short-term gain: Lowering interest rates can give the economy a short-run
boost. Under normal conditions, most economists think a cut in interest rates will
only give a short term gain in economic activity that will soon be offset by inflation.
The quick boost can influence elections. Most economists advocate independent
central banks to limit the influence of politics on interest rates.
Deferred consumption: When money is loaned the lender delays spending the
money on consumption goods. Since according to time preference theory people
prefer goods now to goods later, in a free market there will be a positive interest
rate.
Inflationary expectations: Most economies generally exhibit inflation, meaning a
given amount of money buys fewer goods in the future than it will now. The
borrower needs to compensate the lender for this.
Alternative investments: The lender has a choice between using his money in
different investments. If he chooses one, he forgoes the returns from all the others.
Different investments effectively compete for funds.
Risks of investment: There is always a risk that the borrower will go bankrupt,
abscond, die, or otherwise default on the loan. This means that a lender generally
charges a risk premium to ensure that, across his investments, he is compensated for
those that fail.
Liquidity preference: People prefer to have their resources available in a form that
can immediately be exchanged, rather than a form that takes time or money to
realise.
Taxes: Because some of the gains from interest may be subject to taxes, the lender
may insist on a higher rate to make up for this loss.


How RBI rate hike impacts your
financial life ?
Few days back, there were some changes announced in repo rate and saving bank account
interest rates by RBI. Do you want to know how you as an investor would get impacted with the
recent changes done by RBI? I have seen that a common man always ignores this kind of news
because it looks too complicated to him or he cant understand how his life will be affected by
such fluctuations. In this article, I will touch two most important changes that were recently
disclosed by RBI and show you in simple manner how its directly related to a common man.
Note that this article is limited in its scope by looking at the two changes from the point of view
of its direct impact on a common man.
Let me quickly go through two main changes which RBI recently changed and explain to you
how it impacts common man. Note that this article is limited in its scope of looking at these two
changes only from a viewpoint of how a common man is affected directly.

RBI hikes Interest rate again, more
increase indicated:
MUMBAI: Auto and home loans are set to get costlier as Indias central bank
Thursday hiked short term lending rates by 25 basis points in a bid to curb inflation and
indicated that more such increases were in the offing.
The Reserve Bank of India (RBI) raised the repo rate by 25 basis points from 7.25 per cent to 7.50
per cent with immediate effect. As per the structural changes announced in the monetary policy
for 2011-12, the reverse repo rate stands automatically revised to 6.5 per cent.
This is the tenth time the RBI has raised interest rates since March 2010.
The RBI, in the mid-quarter monetary policy review said, Domestic inflation remains high and
much above the comfort zone of the Reserve Bank. While the Reserve Bank needs to continue
with its anti-inflationary stance, the extent of policy action needs to balance the adverse
movements in inflation with recent global developments and their likely impact on the domestic
growth trajectory, the RBI added.
Latest data showed that annual inflation rose to 9.06 per cent in May, compared to 8.66 per cent
in the previous month. Food inflation too is hovering around a high 8.96 per cent as recorded
for the week ending June 4. The central bank said that the current increase in repo rate would
help contain inflation and anchor inflationary expectations by reining in demand side pressures
and mitigate the risk to growth from potentially adverse global developments.
Other policy rates such as the statutory liquidity ratio and the cash reserve ratio - the minimum
quantum of money against deposits which the banks have to retain as cash or specified
government securities - have been left untouched. The bank rate also remains unchanged at 6
per cent.

Signalling continuation of its hawkish monetary stance, the RBI said it would persist with more
rate hikes to contain inflation.
Based on the current and evolving growth and inflation scenario, the Reserve Bank will need to
persist with its anti-inflationary stance of monetary policy, the central bank said.
It also maintained the projection for gross domestic product growth for 2011-12 at around 8 per
cent.
Meanwhile the Finance Minister, Pranab Mukherjee, speaking in New Delhi on Thursday said the
increase of 25 basis points in repo rate by RBI is a move to maintain an interest rate
environment that moderates inflation and checks inflationary expectations.
The Finance Minister was reacting to Monetary Policy announcement by the central bank in
which it has raised the repo rate by 25 basis points to 7.5 per cent.
The cash reserve ratio (amount of funds that banks have to keep with RBI), however, has been
left unchanged at 6 per cent.

Increase in Repo Rate by 0.5% (6.75% to 7.25%):

Repo rate is a rate at which Bank borrows money from RBI, which was increased by 0.5%
by RBI and is at 7.25% right now. So now what are the effects of it on a common man?
Lets understand this concept. Banks offer loans like Home loans and Auto loans to
someone at an interest rate which is directly proportional to Repo rate (interest rate for
common man = repo rate + X %). Now change in repo rate has a direct impact in the
interest rates offered to customers for loans by the same or by more magnitude.
Now with the increase of 0.5% in repo rate, this increase will directly be passed to a
common man (in case of floating interest rates). In fact some banks like IDBI bank and
Yes Bank have already increased their interest rate for loan takers. In fact,
Chanda Kochar (Managing Director of ICICI Bank) has already said that this repo rate
increase can increase the interest rates for end consumers in the range of 0.5% 1.0%.
So if your interest rate for home loan or Auto loan was 10% p.a, it will now increase to
10.50% at least. This has direct impact on the EMI which you pay for your house.




RBI moots deregulation of
savings bank interest rate:
MUMBAI: The Reserve Bank of India (RBI) on Thursday made a pitch for deregulation of
savings bank deposit rates, saying that deregulation of interest rates on savings bank
(SB) accounts would benefit savers, as it would enable lenders to come out with
innovative products to attract more funds from low-income households.
While the RBI had deregulated interest rates on fixed deposit schemes in 1997, it
continues to fix the rate on savings bank deposits. The interest rate on savings bank
deposits has remained unchanged at 3.5 per cent since March 1, 2003.
As indicated in the second quarter review of Monetary Policy 2010-11 on November 2,
2010, the RBI released on its website a discussion paper on Deregulation of savings
bank deposit interest rate'.
Savings deposit interest rate can not be regulated for all times to come when all other
interest rates have already been deregulated as it creates distortions in the system, the
RBI noted.
International experience suggests that in most countries, interest rates on savings bank
accounts are set by commercial banks based on market interest rates.
Most countries in Asia experimented with interest rate deregulation to support overall
development and growth policies.
These resulted in positive real interest rates, which in turn contributed to an increase in
financial savings. Deregulation of savings bank deposit interest rate also led to product
innovations. The RBI said that deregulation of interest rates in India since the early
1990s has improved the competitive environment in the financial system, imparted
greater efficiency in resource allocation and strengthened the transmission mechanism
of monetary policy.
The only interest rate that continues to be regulated now is the savings deposit interest
rate.
Savings deposit interest rate has not been deregulated for the reason that a large
portion of such deposits are held by low-income households in rural and semi-urban
areas.
Beneficial to savers
The empirical evidence suggests that unlike metropolitan areas, savings deposits in
rural, semi-urban and urban areas are responsive to interest rate changes in savings
deposits.
Therefore, the RBI argues that market-based interest rate may be beneficial to savers.
Since savings deposit is a hybrid product, which combines the features of current
account and term deposit, a market-based rate of interest on this product has the
potential to attract large savings from low-income households.
Deregulation will also allow banks to introduce product innovations which could also
benefit the depositors. Deregulation will have another major advantage in that it will
help improve the monetary transmission.
Since savings deposits constitute a significant portion of aggregate deposits, regulation
of interest rate on such deposits has impeded the transmission of monetary policy
impulses, the RBI stated.
In the light of pros and cons of deregulation of savings deposit interest rate as set out in
the discussion paper, the RBI has also sought feedback from the general public by May
20 to the Adviser-in-Charge, Reserve Bank of India, Monetary Policy Department,
Central Office, 24th floor, Central Office Building, Mumbai-400001.

RBI ups key interest rates by 25
bps to tame inflation:
Continuing its hawkish monetary stance to curb high inflation, the Reserve Bank of India
(RBI) Thursday hiked short-term lending rates by 25 basis points, the tenth time it has
raised interest rates since March 2010.
The repo rate was raised by 25 basis points from 7.25 percent to 7.5 percent with
immediate effect.

"The challenge of containing inflation and anchoring inflation expectations persists,"
said the RBI in the mid-quarter monetary policy review.

As per the structural changes announced in the monetary policy for 2011-12, the reverse
repo rate stands automatically revised to 6.5 percent.
"While the Reserve Bank needs to continue with its anti-inflationary stance, the extent of
policy action needs to balance the adverse movements in inflation with recent global
developments and their likely impact on the domestic growth trajectory," the RBI added.

Latest data showed that annual inflation rose to 9.06 percent in May, compared to 8.66
percent in the previous month.

Other policy rates such as the statutory liquidity ratio and the cash reserve ratio -- the
minimum quantum of money against deposits which the banks have to retain as cash or
specified government securities -- have been left untouched.
The bank rate also remains unchanged at 6 percent.

Highlights of mid-quarter review of RBI monetary policy:
-- Repo rate hiked by 50 basis points to 7.5 percent

-- Reverse repo automatically revised upwards to 6.5 percent

-- Marginal standing facility rate increased to 8.5 percent

-- No change in other statutory rates

-- Deceleration in some interest-sensitive sectors such as automobiles, no evidence of
any sharp or broad-based slowdown

-- Baseline projection for GDP growth for 2011-12 maintained at around 8 percent

-- Domestic inflation remains high and much above the comfort zone of the Reserve
Bank

-- Non-food manufactured products inflation is a matter of particular concern, suggests
more generalised inflationary pressures

-- Impact of the recent monetary policy actions is still unfolding

-- RBI says rate hike will contain inflation by reining in demand side pressures and
anchor inflation expectations

-- RBI says actions expected to mitigate the risk to growth from potentially adverse
global developments

-- RBI will persist with its anti-inflationary stance of monetary policy

-- Although global commodity prices have moderate they still pose a risk to both
domestic growth and inflation.









RBI mid quarterly review needs to
change policy to control inflation:


Mocking the repeated assurances of the Finance Minister of the country to control
inflation, India has seen its headline inflation in May rise to 9.06 per cent. This high rise
is driven by an increase in prices of manufactured goods such as edible oil, textiles,
sugar, paper products, etc.
The rise has made it evident that the Reserve Bank would once again go for another
round of raising interest rates at its mid-quarterly review slated for June 16. The RBI has
in fact raised key policy rates nine times since March 2010.However it is mentionable
that the wholesale price index (WPI) stood at 10.48 per cent during the same period a
year ago while it was 8.66 per cent during the last month, as per the government data.
The International Monetary Fund has already revised the growth projection of Asian
countries, forecasting a downward trend of Indians growth. For 2011, the IMF has
projected Indias growth to dip down to around 8% owing to high inflation and overall
global economic turmoil created due to rising prices of commodity goods and oil.
Though Finance Minister Pranab Mukherjee has repeatedly stated that the government
is keeping a close watch on developments, both domestic as well as international and
that they are keen in taming down inflation, the actual scenario shows the Reserve Bank
and the Indian Finance Ministry has failed so far in controlling inflation. As understood,
the lower growth projection of the country is due to RBIs step of excessive increase in
interest rates, that too repeatedly in the last fiscal.
It is an absolute necessity for the Reserve Bank of India to undertake additional policy
changes to tighten its grip on the economy. All eyes are now on the mid-quarterly
review of the RBI scheduled on June 16.

More hike in interest rates;

Indias central bank Thursday hiked short term lending rates by 25 basis points in a bid
to curb inflation and indicated that more such increases were in the offing.
The Reserve Bank of India (RBI) raised the repo rate by 25 basis points from 7.25 per
cent to 7.50 per cent with immediate effect. As per the structural changes announced in
the monetary policy for 2011-12, the reverse repo rate stands automatically revised to
6.5 per cent.
This is the tenth time the RBI has raised interest rates since March 2010.
The RBI, in the mid-quarter monetary policy review said, Domestic inflation remains
high and much above the comfort zone of the Reserve Bank. While the Reserve Bank
needs to continue with its anti-inflationary stance, the extent of policy action needs to
balance the adverse movements in inflation with recent global developments and their
likely impact on the domestic growth trajectory, the RBI added.
Latest data showed that annual inflation rose to 9.06 per cent in May, compared to 8.66
per cent in the previous month. Food inflation too is hovering around a high 8.96 per
cent as recorded for the week ending June 4.
The central bank said that the current increase in repo rate would help contain inflation
and anchor inflationary expectations by reining in demand side pressures and mitigate
the risk to growth from potentially adverse global developments.
Other policy rates such as the statutory liquidity ratio and the cash reserve ratio - the
minimum quantum of money against deposits which the banks have to retain as cash or
specified government securities - have been left untouched. The bank rate also remains
unchanged at 6 per cent.
Signalling continuation of its hawkish monetary stance, the RBI said it would persist with
more rate hikes to contain inflation.
Based on the current and evolving growth and inflation scenario, the Reserve Bank will
need to persist with its anti-inflationary stance of monetary policy, the central bank
said.
It also maintained the projection for gross domestic product growth for 2011-12 at
around 8 per cent.
Meanwhile the Finance Minister, Pranab Mukherjee, speaking in New Delhi on Thursday
said the increase of 25 basis points in repo rate by RBI is a move to maintain an interest
rate environment that moderates inflation and checks inflationary expectations.
The Finance Minister was reacting to Monetary Policy announcement by the central
bank in which it has raised the repo rate by 25 basis points to 7.5 per cent.
The cash reserve ratio (amount of funds that banks have to keep with RBI), however, has
been left unchanged at 6 per cent.
Mr Mukherjee said that this was on expected lines, as the core inflation hardened to
8.71 per cent in May 2011 in comparison to 7.93 per cent in April 2011. He said that
there was a need to have better price stability for sustaining growth in the medium-
term.


The RBI has continued its upward interest rate revision policy of the past one year by yet
again hiking the interest rates by 50 basis points. The new repo rates are 8% and the
corresponding reverse repo rate (1% lesser than repo rates) is 7%. This in effect will
mean that things are going to be costlier on the borrowing front.



Here's a review of what is in store for the common man with the new changes.
The announcements:
Repo rate hiked to 8.0%
Reverse Repo rate effectively raises to 7.0%
Marginal Standing Facility gets automatically adjusted to 9.0 %
Bank rate and CRR rate maintained at 6.0% each
( Here is a more detailed look at RBI's announcements)

Why has the RBI hiked the prices?
In the words of the Central Bank, the hike has been forced due to 2 major reasons
1. A continued rise in the prices of non-food manufactured products and the rising
Crude oil prices
2. There is also considerable indication that business growth is moderating. Meaning
that higher growth rates a not seen in the coming few months.
Thus, the RBI has deemed it necessary to continue its anti-inflation policy and continue
with raising interest rates.
Over the last one and a half year, the RBI has raised the Cash Reserve Ratio (CRR) by
over 100 basis points and the Policy rate by over 275 basis points. This in effect means
that banks have to face a net effect pressure of around 425 basis points.
This policy stance of the RBI in the past one year has meant that on an average, all
banks/lenders have raised their deposit and Lending rates by over 225 basis points
(2.25%). This means that loans have become costlier for you. Your housing loan, Car
loan, Personal loan etc have all borne the blunt of this upward rise. Although it must
also be seen that deposit rates have gone higher too, the extra income that you get will
be compensated by the extra you have to shell out for gas, oil, soap, food and
everything!

What does it mean for us in the following months?
It is clear that the RBI is not keen on supporting growth without getting the necessary
infrastructure in place. It is clear from all its recent past communications that a major
reason for inflation is the supply side inefficiency and it will do all that it can do on the
monetary side to fight inflation tooth and nail and also manage/minimize the resulting
negative effect on business growth.
The RBI is also committed to ensuring that not all these policies result in a very negative
effect on the liquidity situation. How will this pan out in the coming days?
Loans will be costlier : A direct impact that can be felt in the coming few days is an
inevitable rise in Interest rates charged by banks for their lending products including
home loans and car loans.
Prices will mostly stagnate in the medium term: in the immediate short term, we may
not see any major price changes in the day-to-day products we buy; in the medium-
term, there will be a stagnation of prices due to the anti-inflation measures that have
been implemented in the last 20 months.

Small Industries want status quo on interest rate

Thane, Jul 20 (PTI) The city-based Chamber of Small Industries Association today urged
the Reserve Bank -- ahead of the first quarter monetary policy review next Tuesday --
not to effect any changes in the interest rate. In a statement here, chamber president M
R Khambete said that Micro, Small and Medium Enterprises were apprehensive about
the quarterly review slated for July 26, as the consecutive 10 hikes in short-term lending
rate (repo) in the past 15 months by the RBI had resulted in a steep rise in the lending
rates by the banks. The monetary measures so far effected to arrest inflation have been
ineffective, it said, pointing out that it has impacted MSMEs adversely, leading to cost
escalation. "Currently, MSMEs are paying highest rate of interest," the statement said,
adding that any further hike would hit their competitiveness. The chamber has further
requested RBI to instruct banks not to raise the interest rates for MSMEs in case of any
hike in the key policy rates by the monetary authority next week to tame inflation. June
inflation stood at 9.44 percent, leading analysts to believe that the RBI will go in for
another bout of rate hikes in the Tuesday policy announcement.
Another 50 bps rate hike likely in next 3 months:

Yes Bank
RBI
In an interview with ET Now , Rana Kapoor , MD & CEO, Yes Bank , talks about
inflation, policy rates and Yes Bank's margin outlook. Excerpts:
ET Now: What's your sense on where we stand currently on the macro front in India?
Inflation is in double digits. When do you see inflation peaking out in India?
Rana Kapoor: All the necessary monetary steps have been taken short of the fact that
there may be some further rises in policy rates of about 0.5%. There is an impact of this
with some gestation, which is going to embed in the markets. We are convinced about a
strong probability that inflation will come down to around 6-6.5%. There is a new
normal for inflation, so the previous targets of 5% or so have become somewhat
unrealistic. In this world of volatility, fragilities, exogenous factors on commodity and
energy prices and structural issues that we have on food supply and distribution, we will
find a new normal inflation, which could be between 6-6.5%. That may not be
detrimental for further investment and incremental capital formation in our country

ET Now: The next credit policy is due on 26th of July. Do you expect RBI to move
aggressively again?
Rana Kapoor: We are apparently almost at the end of rate hikes. So further adjustments
of 25 basis points or 50 basis points are not going to shock the markets anymore. So as
a bank and in terms of client expectations, we are adjusted to the fact that another 0.5%
rise could be around the corner in next three months. I do not think that is preventing
new investments or slowing down working capital cycles. India has seen very high
interest rates in the past. This cycle is a mere adjustment from moving out of
quantitative easing to more normalised conditions and at the same time addressing the
peculiar inflation formation despite the slowdown and the stagflation in the rest of the
world. The way we appreciate the markets, it is a matter of another 3-4 months before
we see a downward movement in inflation rates.
RBI set to raise key rates by 25 basis points today
Reserve bank of India
Key rates

MUMBAI: The Reserve Bank of India, or RBI, has said the broad thrust of monetary policy
will have to be on tightening despite risks of slower growth, in what is being perceived
in the financial markets as an indicator that the central bank is set to raise interest rates
again on Tuesday.
In its latest report on macro and monetary developments of the economy, the RBI said
monetary policy would have to preserve its tight monetary stance till there is credible
evidence of inflation trending close to a level within the central bank's comfort zone of
4-4.5%. Taming inflation is an unfinished task considering that price pressures still
persist, it said.
The report, unveiled on the eve of the policy review on Tuesday, is a pointer to another
increase in the key repo rate, or the rate at which the RBI lends to banks against
government securities. All 15 market participants polled by ET over the weekend were
unanimous the central bank would raise repo rate by 25 basis points (1 bps is 0.01%). It
has raised rates 10 times since March 2010 to cool inflation, but its job is far from over
with headline inflation still over 9%. The RBI has projected inflation to come down to 6%
by the end of this fiscal.

The macro report said if the monsoon turns sub-normal, upside risks to the projected
moderation in inflation during the second half would go up. Not only is the headline
inflation still hovering around 9%, but non-food manufacturing inflation also remains
significantly high at above 7%, according to the RBI's assessment. It also cautioned
against a potential impact of the Eurozone crisis on the domestic economy.
"Challenges from the policy perspective have become even more stringent with
increased risks to growth, though inflation is likely to remain high in near term. Risk
factors have emerged that could adversely impact aggregate demand," the report said.

New announcements of rise in interest rates;

The RBI has continued its upward interest rate revision policy of the past one year by yet
again hiking the interest rates by 50 basis points. The new repo rates are 8% and the
corresponding reverse repo rate (1% lesser than repo rates) is 7%. This in effect will
mean that things are going to be costlier on the borrowing front.
Here's a review of what is in store for the common man with the new changes.
The announcements:
Repo rate hiked to 8.0%
Reverse Repo rate effectively raises to 7.0%
Marginal Standing Facility gets automatically adjusted to 9.0 %
Bank rate and CRR rate maintained at 6.0% each



Effects of changes in interest rates by RBI;

It is clear that the RBI is not keen on supporting growth without getting the necessary
infrastructure in place. It is clear from all its recent past communications that a major
reason for inflation is the supply side inefficiency and it will do all that it can do on the
monetary side to fight inflation tooth and nail and also manage/minimize the resulting
negative effect on business growth.
The RBI is also committed to ensuring that not all these policies result in a very negative
effect on the liquidity situation. How will this pan out in the coming days?

Loans will be costlier : A direct impact that can be felt in the coming few days is an
inevitable rise in Interest rates charged by banks for their lending products including
home loans and car loans.

Prices will mostly stagnate in the medium term: in the immediate short term, we may
not see any major price changes in the day-to-day products we buy; in the medium-
term, there will be a stagnation of prices due to the anti-inflation measures that have
been implemented in the last 20 months.
Cars and home will be costlier : Already faced with many pressures due to external
factors, these two industries will take a direct hit of the current hikes. On one hand, their
borrowings will get costlier leading to pressure on margins, and on the other hand since
banks will charge more for loans, they could see a hit on the sales side too.

What does a cut in interest rates mean for the stock market?

When the next Federal Reserve meeting is expected to bring interest rate cuts or
increases, it is wise, as a stock investor, to be aware of the potential effects behind such
decisions. Although the relationship between interest rates and the stock market is fairly
indirect, the two tend to move in opposite directions. Here's why.

A decrease in interest rates means that those people who want to borrow money enjoy
an interest rate cut. But this also means that those who are lending money, or
buying securities such as bonds, have a decreased opportunity to make income from
interest. If we assume investors are rational, a decrease in interest rates will prompt
investors to move money away from the bond market to the equitymarket. At the same
time, businesses will enjoy the ability to finance expansion at a cheaper
rate, thereby increasing their future earnings potential, which, in turn, leads to higher
stock prices. Investors and economists alike view lower interest rates as catalysts for
expansion.

Overall, the unifying effect of an interest rate cut is the psychological effect it has on
investors and consumers; they see it as a benefit to personal and corporate borrowing,
which in turn leads to greater profits and an expanding economy.



Expert views on RBI rate hike;

The Reserve Bank of India (RBI) raised interest rates by a higher-than-expected 50 basis
points on Tuesday, stepping up its fight against persistently high inflation despite
slowing growth in Asia's third-largest economy.
The RBI increased the repo rate, at which it lends to banks, to 8 percent, exceeding
market expectations that it would raise rates by 25 basis points.
The rate increase is its 11th since March 2010, making the RBI one of the most
aggressive inflation fighters among central banks.
ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI:
"The RBI's action is more aggressive than expected and clearly highlights that inflation
management is the priority for the central bank.
"It is very likely that the tightening cycle will be continued as the central bank has clearly
stated that a "change in stance will be motivated by signs of a sustainable downturn in
inflation". WPI inflation in our view is yet to peak out."
NITESH RANJAN, ECONOMIST, UNION BANK OF INDIA, MUMBAI:
"50 bps without any forward looking signal on end of cycle is quite surprising. The
expected inflation trajectory for 12-month forward has not changed in recent times but
the RBI's actions since May 2011 do not give clear sense on future course of policy rates.
"If the RBI is looking at sustained downtrend in core inflation before it takes a pause,
then we have more actions left. In my view, the RBI should take a pause till November
and wait to see the transmission impact of actions taken so far."





RBI likely to go for another rate hike in Sept: Experts

The Reserve Bank of India is likely to continue with its tight monetary policy stance to
fight inflation and effect another hike in key interest rates in September, even though
the global economic environment is on a downslide, believe experts.
However, while the Reserve Bank of India is likely to go for another interest rate hike at
its next mid-quarterly policy review on September 16, it will not be very aggressive, the
experts said.
According to global research firm Macquarie economist Tanvee Gupta Jain, "While the
RBI will continue on its anti-inflationary stance, adverse global environment suggests
that it might become less aggressive..."

Market reaction on Reserve Bank of India rate hike;
MARKET REACTION:
* The 30-share BSE index fell 1.4 percent to 18,605.18 points after the policy.
* The 10-year benchmark bond yield rose 8 basis points to 8.40 percent immediately
after the announcement.
* The benchmark five-year swap rate was up 8 basis points at 7.66 percent, and the one-
year rate rose 17 basis points to 8.15 percent, traders said.
* The partially convertible rupee was mostly unmoved at 44.29/30 per dollar.
BACKGROUND:
- The Reserve Bank of India (RBI) had raised policy rates by 275 basis points in 10 moves
over 15 months to June to control stubbornly high inflation.
- The rate increases have dented manufacturing activity and growth. Industrial output
rose 5.6 percent in May, its weakest pace in nine months.
- India's economy, Asia's third-largest, is largely driven by domestic demand.
Policymakers last week scaled back their economic growth target from 9 percent set
earlier, with many private economists predicting below 8 percent in the fiscal year
ending next March. The RBI projects it around 8 percent.
- Annual inflation quickened in June, driven by higher prices of manufactured goods and
fuel. The wholesale price index, India's main inflation gauge, rose an annual 9.44
percent, though below the median forecast for a 9.70 percent rise in a Reuters poll.
- In its policy review in May, the RBI projected headline inflation at 6 percent by end-
March 2012, with an upward bias.
(Compiled by Swati Bhat; Reporting by Mumbai Treasury Team; Editing by Ranjit
Gangadharan