RBI surprises with 0.25% rate hike, stock markets tank

RBI Governor Raghuram Rajan today surprised the industry and shocked the stock markets by hiking the short-term policy rate by 0.25 per cent to keep "worrisome" inflation under check, a move that may increase EMIs for home and auto loans in the medium term.
Contrary to the expectations of the industry and experts, Rajan in his maiden policy opted for a hawkish monetary policy stance ahead of the festive season instead of shifting the focus to promotion of growth by lowering interest rates to generate demand.
The RBI Governor, however, eased liquidity through a reduction in the marginal standing facility rate, at which banks borrow from the central bank, by 0.75 per cent to 9.5 per cent and eased the minimum daily maintenance of the cash reserve ratio (CRR).

The repo rate, or the short-term lending rate, has been increased by 25 basis points to 7.5 per cent from 7.25 per cent with immediate effect. Other policy rates will be adjusted accordingly.
"The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand. Keeping all this in view, bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately," Rajan said in the policy statement.
Although bankers don't see any immediate increase in interest rates for individuals and corporate borrowers, the benchmark S&P BSE Sensex tanked by as much as 595 points after the policy announcement, while the rupee depreciated 69 paise to 62.46 against the dollar.

"The increase in repo rate could have been avoided as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation...The increase in repo rate come as a surprise," CII Director General Chandrajit Banerjee said.
Yesterday, the country's largest lender, State Bank of India, increased its minimum lending rate to 9.8 per cent.