Policy rates up again as Indian central bank acts on inflation (Roundup)

March 17th, 2011 - 5:41 pm ICT by IANS  

Mumbai, March 17 (IANS) India’s central bank Thursday hiked its short-term lending and borrowing rates by 25 basis points for the eighth time in 15 months to tame stubborn inflation, in a move that could alsov make corporate, housing and auto loans dearer.

Reserve Bank of India (RBI) Governor Duvvuri Subbarao hiked the repurchase or repo rate to 6.75 percent from 6.5 percent and reverse repo rate to 5.75 percent from 5.5 percent. Other rates like cash reserve ratio and statutory liquidity ratio remained unaltered.

With industry expecting as much, the key policy rates were tinkered for the eighth time since January last year as part of the mid-quarter review of the central bank’s monetary policy by the governor at the headquarters on Mint Road in downtown Mumbai.

The central bank also revised upward its inflation forecast sharply to 8 percent by end-March, from 7 percent forecast in January and a lower 5.5 percent in November while the projection on growth has been retained at 8.5 percent.

“Further upside risks have stemmed from high international crude prices, their impact on freely-priced petroleum products, the increase in administered coal prices and pick-up in non-food manufactured product prices,” the central bank said.

“Policy action in the review is expected to continue to rein in demand-side inflationary pressures while minimising risks to growth, and manage the inflationary expectations and contain the spill-over of food and commodity prices into more generalised inflation.”

The apex bank also warned it would act again with policy interventions if the situation warranted. “Based on the current and evolving growth and inflation scenario, the Reserve Bank is likely to persist with the current anti-inflationary stance.”

India Inc and experts said they expected the policy intervention by the Reserve Bank on expected lines since inflation, especially concerning food prices, ruling at around 8-9 percent, was well above the comfort level of four-five percent.

“With food inflation showing signs of moderation and the manufacturing product inflation modest, this would have been a good time for the central bank to pause the liquidity tightening exercise,” said Shanto Ghosh, principal economist with consultancy Deloitte.

“One also wonders if it is time to question the rationale for this move in light of the inadequate response to seven moves in the past to control inflation. The effectiveness of interest rate in controlling inflation in the Indian context seems to be failing.”

The Federation of Indian Chambers of Commerce and Industry (FICCI), like other industry lobbies, also wondered on similar lines, especially when the country’s factory output has been showing uneven expansion, which could have a bearing on the growth numbers.

“Reserve Bank’s action in raising policy rates, though expected, will adversely affect growth prospects,” said Rajiv Kumar, director general of the apex chamber. “There is also a lot of nervousness in the market given the global developments.”

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.

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