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RBI raises policy rates; no hike in interest rates for now

The Reserve Bank has raised key short-term policy rates by 25 basis points, in an unscheduled announcement, to tame doubled-digit inflation, but bankers said this wouldn't lead to any hike in interest rates for now.

The increase in rates comes ahead of the 27th July policy review by the apex bank, which feels that money supply in the system has started easing in contrast to the crunch felt just a fortnight ago when corporate demand for funds shot up.


RBI's decision to increase the short-term rates at which it lends (repo) and borrows (reverse repo) money from commercial banks, however, may not have any immediate impact on the interest rates which home and car loan seekers and corporate borrowers pay, say bankers.


Hike in repo and reverse repo by 25 basis points to 5.50 percent and 4 percent, respectively, "should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process", said the RBI.


Wholesale prices-based inflation crossed double digits (10.16 percent provisionally) in May, but as per final figures the rate of price rise has been 11 percent or more since February.


Food inflation eased to 12.92 percent in the third week of June from above 16 percent.


Justifying its mid-course action, the RBI said, "The developments on the inflation front, however, raise several concerns...Food price inflation and consumer price inflation remain at elevated levels. There has been some moderation in food price inflation, but the price index of food articles continues to increase".


RBI had earlier increased the repo and reverse-repo rates by 25 basis points in April.


On the impact of hike in key rates on interest rates, State Bank of India (SBI) Chairman O P Bhatt said, "RBI's move may not impact interest rate till July 27...RBI's (move will) not impact base rate of SBI."


The bank would think of some decision only after the monetary policy review on 27th July, said the chief of SBI, which this week pegged the base rate, the minimum lending rate, at 7.5 percent.


RBI's action, said ICICI Bank CEO and MD Chanda Kochhar, "is consistent with its gradual normalisation of policy rates towards a level consistent with the economic growth, in a non-disruptive manner."


Although the monetary tightening steps are being announced at a time when the banks are complaining of liquidity crunch arising from payment of more than Rs one lakh crore towards 3G licence fee and advance taxes, the RBI said the liquidity situation has started improving.


"Through the month of June, liquidity...remained in deficit mode. Consequently, the call rate moved up significantly, resulting in an effective tightening at the short end of the yield curve. The liquidity situation has since begun to ease", said the RBI statement.


Besides, the RBI has extended the additional liquidity facility, through which it infuses liquidity in the banking system, till 16th July.


The facility was to end on Friday.



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