Inflation forces another rate hike by India’s central bank (Second Lead)

May 3rd, 2011 - 4:44 pm ICT by IANS  

Pranab Mukherjee Mumbai, May 3 (IANS) Laying emphasis on curbing inflation over growth, India’s central bank hiked its short-term lending rate by 50 basis points and said in a major policy decision Tuesday that the borrowing rate shall now on be pegged 100 basis points below it.

The Reserve Bank of India (RBI) also hiked the deposit rate by 50 basis points to 4 percent, from 3.5 percent - a move that should bring some cheer to millions of savings bank account holders, who park cash for short durations with commercial banks.

Repurchase rate, or the short-term lending rate, now stands at 7.25 percent against 6.75 percent earlier, while the reverse repurchase rate, or the short-term borrowing rate, now automatically stands revised to 6.25 percent, against 5.75 percent.

“The 50 basis points increase in repo and reverse repo rates came along expected lines. The increase of 50 basis points in savings interest rate was a surprise and is expected to have a marginal impact on the net interest margins of banks. They may pass it on to the consumers in due course of time,” said Dipen Shah, senior vice president, private client group research, Kotak Securities.

RBI Governor D. Subbarao, who unveiled the monetary policy for this fiscal, before the chief executives of commercial banks at the RBI headquarters at Mint Street in mid-town Mumbai, said these policy decisions take immediate effect.

Other policy rates such as the statutory liquidity ratio and the cash reserve ration — the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities — have been left untouched.

The bank rate also remains unchanged at 6 percent.

“The Reserve Bank’s baseline inflation projections are that inflation will remain elevated, close to the March 2011 level over the first half of 2011-12, before declining,” Subbarao said.

Over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty. Current elevated rates of inflation pose significant risks to future growth,” he said.

“Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence,” the governor added, spelling out what guided the monetary policy stance for the current fiscal.

Reacting to the monetary policy, Finance Minister Pranab Mukherjee told reporters in New Delhi that the rate hikes were in order since it was necessary to contain inflation that had started behaving “erratically” again after showing signs of easing.

But industry bodies strongly opposed the latest rate hike and said tackling inflation should be done by dealing with supply side issues and curbing government expenditure.

“This is certainly a very hawkish monetary stand and one which would make the investment environment even more difficult. We are afraid that with growth slowing down, as now admitted by the RBI, employment targets will not be achieved and this could generate greater social pressure,” Rajiv Kumar, director general, FICCI said in a statement.

The Confederation of Indian Industry (CII) too was critical of the increase in interest rates.

“The continued monetary tightening without any movement on structural reforms to address supply side bottlenecks will have an added impact on capacity creation and expansion,” said Chandrajit Banerjee, director general, CII.

While inflationary pressures are primarily driven by global factors and domestic fiscal situation is also tight, this presents an opportune time for the Government to move forward on structural reforms in agriculture, land and foreign direct investment,” he added.

The repo rate, often referred to as the short term lending rate, is the interest charged by the central bank on borrowings by commercial banks. A hike in the rates makes cost of borrowing costlier for the commercial banks.

The reverse repo rate, referred to as short term borrowing rate, is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park funds with the central bank.

The cash reserve ratio and statutory liquidity ratio determines the amounts banks have to retain in liquid assets, gold and government bonds against deposits, and together form a part of traditional instruments that help in checking liquidity in the system.

In the monetary policy, the central bank made the following projections:

-Baseline projection for the gross domestic product growth for this fiscal at around 8 percent

-Annual whole sale price inflation pegged at 6 percent by end-March 2012

-Major challenge if oil and commodity prices remain elevated

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