Repo rates hiked. Car, home loans may not get dearer

The Reserve Bank of India raised interest rates by 25 basis points as well as deducted the MSF rate by 25 bps. The move was expected because the markets had factored in this hike. In fact, it came in as good news as the RBI didn't go for a 50 bps hike.

The move by the RBI is an attempt to curtail the high inflation. After the hike, the repo rate or the rate at which RBI lends short term money to commercial banks, has gone up to 7.75 per cent. The cash reserve ratio, or the minimum percentage of the total deposits that commercial banks have to hold as reserves with the central bank, remains unchanged at 4 per cent.

The RBI's move may force banks to increase interest rates on loans leading to higher EMIs for existing home loans and costlier retail loans for new customers. However for private banks this is compensate by the cut in the MSF rate. MSF or the Marginal Standing Facility is the rate at which scheduled banks could borrow funds overnight from the Reserve Bank of India (RBI) against approved government securities. RBI-Reserve Bank of IndiaBanks can borrow funds through MSF during acute cash shortage (considerable shortfall of liquidity). This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively.