RBI hikes short-term interest rates

The RBI raised short-term lending and borrowing rates by 25 basis points.

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

Welcoming the steps taken by RBI,Finance Minister Pranab Mukherjee said,”(they) are desirable given that core inflation has risen and credit situation is tight.”

The increase in rates comes ahead of the July 27 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.

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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.

Mukherjee also expressed satisfaction over the decision of the RBI to not raise the Cash Reserve Ratio (CRR),the amount of deposits that banks are required to keep with the central bank. “It is good that RBI has not raised CRR,” he added.

The hike in repo and reverse repo by 25 basis points to 5.50 per cent and 4 per cent,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 per cent provisionally) in May,but as per final figures,the rate of price rise has been 11 per cent or more since February. Food inflation eased to 12.92 per cent in the third week of June from above 16 per cent.

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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.