The Hindu : Front Page : RBI hikes lending rate

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Thursday, Jun 12, 2008
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RBI hikes lending rate

Special Correspondent

No change in reverse repo rate
Raises open market operations ceiling

MUMBAI: The Reserve Bank of India (RBI) on Wednesday hiked the short-term lending rate, repo rate, by 25 basis points to 8 per cent from 7.75 per cent with immediate effect. There is no change in the reverse repo rate.

The repo rate is at which banks borrow from the RBI and the reverse repo rate is at which the RBI borrows from banks.At the time of its annual policy announcement (April 29), the RBI had raised the Cash Reserve Ratio (CRR) by 25 basis points to 8.25 per cent. CRR is the portion of deposits banks must keep aside as reserve. However, it left the repo and reverse repo rates untouched.

Reacting to the increase in the repo rate by the RBI, the Federation of Indian Chambers of Commerce and Industry (FICCI) said that the increase in the repo rate was not unexpected as inflationary pressures were building up and inflation had touched 8.24 per cent for the week ending May 24. FICCI, however, still reiterates its stand that interest rate hike at this juncture is not advisable, particularly when the tightening monetary policy stance of the RBI has had an adverse impact on industrial growth.

Further keeping in view the systemic implications of the liquidity and other related issues now faced by public sector oil companies arising from the unprecedented escalation in international crude oil prices, the RBI had decided on May 30 to put in place Special Market Operations (SMOs) for the smooth functioning of financial markets and for overall financial stability. Accordingly, the RBI had decided to conduct open market operations (outright or repo at the discretion of RBI) in the secondary market through designated banks in oil bonds held by public sector oil marketing companies in their own accounts subject to an overall ceiling of Rs. 1,000 crore on any single day. However, on a review of the operations, it has been decided on Wednesday to enhance the overall ceiling of open market operations to Rs. 1,500 crore on any single day from Rs. 1,000 crore.

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