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Economy

RBI Ups Repo to 6.75%

RBI today increased the Repo rate by 0.25% to 6.75%. Repo is what banks pay the RBI for overnight (1 to 3 days) borrowing. Reverse repo, or what the RBI pays for excess cash parked with them, is up to 5.75%.

Please don’t consider this a big deal just yet. here’s the long term history of rates:

India Repo Rate Chart

We have rates going up only to levels seen in June 2006. But, inflation was a lot more controlled then, and we have had very heavy inflation since 2009 now. There is a LOT of room for increasing rates.

Strangely, June 2006 was the bottom of the post-RPL-listing crash, which many of you won’t even remember, but the Nifty had fallen about 30% in two months since the big IPO of Reliance Petroleum Limited, which has since been merged with RIL.

The subsequent rally took the Nifty up about 150% over the next year and a half.

Nifty 2006-08 chart

But would you bet on that today? There was cheap money then worldwide, there is cheap money now. We’ve just come off a recent high. The differences are that the world economy is a lot more shaky, and that inflation is very high.

The conclusion, though, is that rates are not as high as they should be – I think we should be in the 8% range to make any impact.

Worst hit today are Maruti (-4%) and HDFC (-3%). Strangely none of the big banks seem to have lost a lot.