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Interest rates on corporate and retail loans are set to go up as the Reserve Bank of India hiked its short-term lending rates on Tuesday for the second time in the last two months.
The reverse repo rate â€” the rate at which the RBI borrows funds from banks â€” has been raised by 25 basis points to 6 per cent. Consequently, the repo rate or the rate at which the RBI lends to banks has also risen to 7 per cent. These are the highest short-term rates in the last four years.
Indicating that inflationary pressures may continue due to global and domestic factors, Dr Y.V. Reddy, Governor of the RBI, said the decision to hike the rates was a pre-emptive measure to keep inflation between 5 and 5.5 per cent in the current year.
The central bank has kept its other rates such as the Bank Rate and CRR unchanged at 6 per cent and 5 per cent respectively.
This is the third hike in repo rates in the current year. The RBI had first hiked rates in January, then in June and now in July. Most banks raised their retail lending rates and prime lending rates after each RBI rate hike.
Banks, already under pressure from rising cost of funds, are expected to hike lending rates yet again.
Explaining the rationale in hiking the short-term rates just over a month after the previous hike, Dr Reddy said it was required in order to maintain “the informal, indicative, self-imposed ceiling of 5 per cent on inflation over the medium to long-term.”
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