RBI raises interest rates by 25 basis points, loans to become costlier

MUMBAI: The Reserve Bank of India (RBI) on Friday raised interest rates by a quarter of a percentage point, its 12th hike since March last year, to combat near double-digit inflation.

Repo rate is the rate at which banks borrow money from RBI. When the repo rate increases, borrowing from RBI becomes more expensive.

The Reserve Bank of India (RBI) raised its repo rate, at which it lends to commercial banks, by 0.25 basis points to 8.25% and increased the reverse repo -- the rate it pays to banks for deposits -- to 7.25%.

Headline inflation for August rose to 9.78 percent, its highest level in more than a year, data showed on Wednesday.

India's economic growth has cooled as the cumulative impact of earlier rate increases and rising prices crimp demand, and an expected pause in tightening connects it to the Asia bandwagon of central banks rolling back on rate hike campaigns.

The rupee rose for a second consecutive day on Friday after the coordinated action by major central bankers to add liquidity into the European banking system.

Economists further said that the weakening of the rupee against the US dollar was bad news for policy makers grappling with inflation.

"The recent depreciation of the rupee relative to the US dollar would exert pressure on the prices of imported items... Accordingly, we expect the RBI to persist with monetary tightening and hike the repo rate by 25 basis points in the upcoming policy review, despite the sluggish industrial growth," ICRA economist Aditi Nayar said.