Loans to purchase cars and houses are set to become costlier with the Reserve Bank of India raising the interest rate for banks. Raghuram Rajan, in his maiden policy review as Governor of RBI, on Friday, hiked the repo rate by 25 basis points to 7.50 per cent. The repo rate is the rate at which banks borrow from the central bank.The move will have consequential effect down the line in the form of rise in interest rates for retail borrowers.

The unexpected hike in the repo rate has sent stocks and the rupee hurtling down.

The rate hike, meant to quell inflation, indicates that the RBI will continue to focus on price stability under Dr. Rajan’s governorship.

The new Governor, however, withdrew some emergency measures put in place by his predecessor to arrest the rupee slide against the dollar. The Indian currency slumped in the wake of hints that the Federal Reserve of the U.S. would taper the massive $85 billion a month stimulus package.

With the Fed deciding putting off the tapering process for withdrawal of stimulus, the worry on rupee slide has somewhat subsided for the new Governor. And, hence he was able to withdraw some of these emergency measures, which were basically aimed at reducing the liquidity in the banking system. These measures had the effect of raising short-term interest rates.

“We believe that easing the exceptional liquidity measures was warranted given that the external environment has improved,” Dr. Rajan said. “We remain vigilant about external market conditions, and will do what is necessary if they deteriorate once again,” he asserted.

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