The Hindu : Business : RBI hikes short-term rates

Online edition of India's National Newspaper
Wednesday, Jul 26, 2006

Business

Business

RBI hikes short-term rates

Oommen A. Ninan

Repo, reverse repo rates raised by 25 basis points

TACKLING PRESSURE POINTS: Y. V. Reddy, Governor, Reserve Bank of India, with Shyamala Gopinath, Deputy Governor, at a press conference in Mumbai on Tuesday. — Photo: Paul Noronha

MUMBAI: The Reserve Bank of India (RBI) on Tuesday hiked the short-term indicative interest rates by 25 basis points (0.25 percentage point) with pressure escalating on interest rates in both domestic and global markets.

However, other monetary instruments like the Bank Rate (long term indicative interest rate) and the Cash Reserve Ratio (CRR) — the amount of cash banks have to keep as reserve — are continue to remain at the same levels.

With the cost of funds increasing, margins of banks would be under pressure. This means bank loan rates, including housing loans, would be costlier. The central bank raised the reverse repo rate (the rate at which the central bank borrows short-term funds from commercial banks or the process of sucking off of funds from the system) from 5.75 per cent to 6 per cent and the repo rate (the rate at which the RBI lends its short term funds or the process of injecting funds into the system) to 7 per cent with immediate effect.

"The current situation calls for some stabilising influences while keeping all options open for the future to maintain a successful and dynamic balance between growth and stability that has been the hallmark of our macro economic policies during the reform period," RBI Governor Y. V. Reddy said while addressing a press conference here on Tuesday.

Dr. Reddy expressed concern in particular over the fact that the credit growth of banks was much higher than deposit mobilisation.

In his first quarter review of Annual policy for 2006-07, Dr. Reddy said, "The global outlook for growth is positive but downside risks in regard to inflation and re-pricing of risks in financial markets need to be recognised". He was mentioning about higher global oil prices mainly due to unrest in West Asia creating inflationary concerns, leading to hardening of interest rates in other global economies, including the U.S. and Japan.

While prices of oil and metals continue to be the main drivers for inflationary pressure, food prices have started edging up. "We consider this is an extraordinary situation," Dr. Reddy felt.

Substantiating a raise in short-term interest rates, Dr. Reddy said that both domestic and global factors were delicately balanced in terms of growth vis-a-vis price stability with a tilt towards the possibility of identified downside risks materialising in the near term being more likely than before.

"The unfolding path of the identified risks, however, is naturally unclear at this stage," said Dr. Reddy, adding that "on balance, a modest pre-emptive action in monetary policy is appropriate at this juncture while being ready to respond flexibly and promptly by closely monitoring the related developments."

"These measures would enable us to contain inflation within 5 to 5.5 per cent for the current fiscal... This is a self-imposed mandate," Dr. Reddy asserted. He also retained the gross domestic product (GDP) growth projection for 2006-07 at 7.5 to 8 per cent. The RBI Governor also emphasised that the central bank would respond swiftly to evolving global events. "Our policy should be pre-empt global events. Do not be surprised such actions take place swiftly.''

Printer friendly page
Send this article to Friends by E-Mail

Business