RBI hiked interest rates by 25bps for the 10th time in 16 months as it resists handling the mounting inflation. The RBI has raised the short-term lending (repo) rate by 25 basis points to 7.50 per cent and the short-term borrowing (reverse repo) rate by a similar margin to 6.5 per cent.
The purpose of hiking interest rates is to reduce the money supply to the public. Higher rates of interest implies that borrowing will not be easy for those who wish to invest in new industries, expand existing infrastructure, purchase houses or vehicles, etc. This has a negative tendency of slowing down growth
Like the markets reacted very negatively to this act and this latest hike will further dampen the auto sector because industry is already under pressure and this fresh step will further worsen the condition, followed by high inflation and high fuel prices.
Other factor which affected world markets and currencies was rate hike by China and Australia is on the cards which resulted in weakening of Euro and Dollar.
Finally coming back to Indian Scenario, Dalal-Street experts see Sensex sinking to 15k by December 2011. Investors worldwide are more risk-exposed because of the European crisis and this will result in the market trending lower over a period of time. The majority of the factors affecting inflation are given out from a gush in prices of imports and exports which RBI is not able to handle ad so it should wait and watch more local and global data before taking further actions.