Implications of recent hike in repo rate:
The recent move of RBI to increase repo rate by 25 basis points was inevitable after sharp rise of inflation on whole sale price index. It’s certainly a preemptive action from RBI to combat inflationary expectations as the rate of rise in prices touched a 45-month high of 8.24 per cent. No one can deny from the fact that the inflation is going to hit a double digit mark once the increased price of petroleum gets reflected in the official whole sale price index. Clearly it’s a bad sign for economy. This current phase of stagflation is mostly driven by supply side issues.
The repo rate has been raised for the first time since March 2007, when manufacturing was growing at 16% and wholesale price inflation was at 6.7%. Gross domestic product (GDP) growth during January-March 2007 was at 9.7%. In the 14 months since March 2007, manufacturing growth has slowed to 7.5% while GDP growth in the January-March 2008 quarter too has slowed to 8.8%. Yet inflation based on wholesale price index has gone up more than 8%. Clearly, while RBI has been able to slow growth, it hasn’t been able to tame inflation. That’s because much of the inflationary pressure is driven by globally determined commodity prices, about which RBI can do little. At the same time, the repo rate hike seems to indicate that RBI believes that lowering demand is the only way it can have any effect on inflation.
This move from RBI will cause some serious implications on growth .some of the direct impacts that consumer will have to bear are
1. Home loan rates may rise after the Reserve Bank`s step as cost of resources for banks has taken an upturn. It will slightly hurt real estate industries.
2. It may be possible that bank will make a downward revision of deposit rate. Return of fixed deposit will be lowered.
3. This rise in interest rates could hamper industrial growth, which has dipped to 3 per cent in March, as industry chamber FICCI said, "RBI policy is not going to help because the increase in prices is due to global phenomena".


In my opinion RBI has taken a right step by increasing repo rate this time. I completely agree that it will entice foreign institutional investors to invest money in capital market. This move is also justified from the point of view that in recent days capital markets and money markets are highly volatile and FIIs are net sellers. Another thing is that in my opinion there is no ONE TO ONE relationship between inflation and growth. Growth is dependent on many factor not only cost of credit. Despite of 150 basis point hike in Cash Reserve ratio, the recent 7% growth rate in manufacturing sector jettisoned by more than 8% growth in mining sector has authenticated this fact.
So with an optimism of superior future I extol this move from RBI .