The Hindu : Business : RBI signals tightening interest rate regime

Online edition of India's National Newspaper
Wednesday, Jan 25, 2006

Business

Business

RBI signals tightening interest rate regime

Special Correspondent

Raises reverse repo rate by 25 basis points to 5.5 per cent

CONTAINING INFLATION: Reserve Bank of India Governor, Y. V. Reddy (left), and Deputy Governor, Rakesh Mohan, at a press conference in Mumbai on Tuesday. — Photo: Vivek Bendre

MUMBAI: Amid prospects of strong economic growth, the Reserve Bank of India (RBI) on Tuesday raised the short-term interest rate by 25 basis points or 0.25 percentage point, with immediate effect, to contain inflation within the projected range of 5 to 5.5 per cent. It raised the forecast for economic growth to 7.5 to 8 per cent in the current financial year and expressed optimism about maintaining the same Gross Domestic Product (GDP) growth in the next financial year.

The indicative upward bias in the short term interest rate is likely to result in further rise in lending rates of banks, which means credit, including housing loans, would be costlier. "This is a pre-emptive and forward looking measure,'' said Rakesh Mohan, Deputy Governor of RBI.

The rise in demand for bank credit combined with fears of higher inflation from surging oil prices, and global interest rate trends led the central bank to raise short term interest rates.

"There is some concern on credit quality. We have to stress this concern," Dr. Mohan added.

The central bank hiked the repo rate (the rate at which banks park their short term funds with the central bank or the process of sucking out of funds from the system) and reverse repo rate (the rate at which the central bank lends short term funds to commercial banks or the process of injection of funds to the system) by 0.25 percentage point to 5.5 per cent and 6.5 per cent, respectively, as part of measures to rein in inflation. It, however, kept the benchmark Bank Rate (at which it lends long term funds to commercial banks) unchanged at 6 per cent and the Cash Reserve Ratio (the amount of cash banks have to keep as reserve) at 5 per cent. "The GDP growth in the current fiscal is placed in the range of 7.5 to 8 per cent based on the current assessment of a pick up in agricultural output and in the momentum in industrial and services sectors,'' said Y. V. Reddy, RBI Governor, at a press conference here, while announcing the Third Quarter Review of Monetary Policy for 2005-06.

In the second quarter, the RBI raised the growth forecast to 7 to 7.5 per cent from 7 per cent at the beginning of the current financial year in April 2005.

The RBI stated that though it continue to pursue its medium term objective of reducing the CRR to the statutory minimum level of 3 per cent, "on a review of the current liquidity situation, it is felt desirable to keep the present level of CRR at 5 per cent unchanged."

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