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RBI Hikes Interest Rates By 0.50%

The RBI increased Repo rates to 8% (from 7.50%), a 50 basis point increase. Repo is what banks pay to borrow overnight from the RBI, a key rate that is usually the floor for inter-bank lending rates and thus interest rates in the system.

Reverse repo (or what banks get for parking money with the RBI) is now at 7.0%, up from 6.5%.

My earlier post talked about the strong language in yesterday’s first quarter review and thus the small (20%) chance that the hike would be more than the normal 0.25% which was more or less expected.

Here’s a quick historical repo rate chart. More analysis later in the day.


We are at the highest since November 2008 and have been higher only for five months (June to October 2008) when oil hit the $140 per barrel limit and then all hell broke loose with Lehman and co. I don’t think this is a predictor of a crisis (come on, a data size of one?).

Markets: Nifty has fallen 90 points (short of 2%) at 5590. BankNifty is down nearly 2.5%, and the CNX Realty index is down 3%.

The 10 year bond yield jumped from 8.30% to 8.38%. Overnight indexed swaps (OIS) stay flat at 8% for one year, and an inverted 7.57% for five years. This is not dramatic for the bond markets, yet.

More to come…

  • Arghya says:

    I don’t know if you could recall, during our economic discussion I said Indian could well slip into stagflation (inflation + recession). I would say RBI’s action is too little too late. Inflation is already out of control thanks to huge infusion of black money into the economy because mega-scams and commonwealth-game.
    I believe there would be very little effect of any monetary policy. Rate interest would only throw the economy into recession, it can’t control inflation anymore. Unless government takes stern actions (fiscal policy) to suck out the flood of unaccounted money from the system there is no hope. India would slip into stagflation.

  • manish motwani says:

    Sir, as of i know that reverse repo is function of repo rate, i.e reverse repo rate = repo rate – 100 bps(1%) but how come reverse repo be 6.5% when repo is 8%. please make clear if i am wrong.