The Reserve Bank’s 2011-12 monetary policy review will burn a hole in the pockets of the salaried classes. The half per cent rise in the repo rate (that at which banks borrow from the RBI) will translate into home loan rates rising to 9.75 per cent from 8.75 per cent. The rise will be even sharper for those borrowing to buy a car, personal needs like emergency funds, travel or hospitalisation.
RBI governor D. Subbarao explained this was necessary to curb demand, the main driver of inflation in 2011-12, against the supply side (food) which drove inflation last year. He said the rise was a “little sacrifice” to enable future growth, while he revised GDP growth downwards to eight per cent from 8.7 per cent, and the wholesale price index to six per cent by March 2012.
Finance minister Pranab Mukherjee supported the RBI’s hawkish stance, saying it was “necessary to contain inflation” as inflationary pressure in the economy was “still very high”.
The RBI governor said inflation could remain up in the first half of the year due to expected pass-through of the increase in oil prices globally. He hinted at a “significant suppressed component” of inflation as crude price hikes were not passed on since June 2010.