MUMBAI, APRIL 20
The RBI today hiked key short term rates and banks’ cash reserve requirement by 25 basis points each to rein in inflation, but lenders said interest rates on commercial and personal loans won’t go up immediately.
But today’s hike — the second policy action in a month — will lead to gradual rise in interest rates as banks will see Rs 12,500 crore squeezed out from their system following the 25 basis points hike in CRR, lenders said.
Besides, the apex bank hiked repo and reverse repo (the rates at which it lends to and borrows short-term funds from banks) by 25 basis points each to 5.25 per cent and 3.75 per cent, respectively. These rates were hiked by an identical margin on March 19.
While Finance Minister Pranab Mukherjee said: “These policies should have a gentle impact in tightening money in the economy and should dampen further inflationary pressures”, RBI committed itself to more policy steps to control inflation without choking the economy.
The central bank said it expects the economy to grow by 8 per cent in FY’11 — lower than the government’s 8.5 per cent projection — and inflation to ease to 5.5 per cent by this fiscal end.
Wholesale prices-based inflation stood at 9.90 per cent in March this year, fuelled by high food prices.
The Reserve Bank also did not rule out further tightening of monetary policy before the next review, slated for July 27, saying this depends on monsoon, crude prices and demand pressures.
“I will not rule out mid-cycle action because we do not know how the situation will evolve,” RBI Governor D Subbarao told reporters after the annual policy for 2010-11 was unveiled.
While bankers ruled out immediate hike in lending rates, they said the cost of credit may go up as the year progresses.
ICICI Bank’s Chief Chanda Kochhar said: “During the year, I do see the lending rates going up but I don’t see any immediate impact on rates as of now.”
The country’s largest lender SBI’s Chairman O P Bhatt said: “Whatever has been done (in the policy) has reduced the supply. So, definitely there is an upward bias in rates. As (credit) demand increase, there will be a demand-supply gap, then there is a possibility of interest rates going up.”
Industry chamber FICCI secretary general Amit Mitra said the RBI move would put pressure on interest rates, but lending rates would not go up immediately.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said: “I don’t think it (RBI’s monetary policy) would have any adverse affect on (GDP) growth rate.”
Even after the hike in key short term rates, these rates are still in negative, if inflation is adjusted for, Subbarao said.
“With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments,” Subbarao said.
The RBI had, in January, begun the process of rolling back the easy money policy introduced in the wake of the global financial crisis of 2008.
“And everything need not be done in one step and we believe that moving in several baby steps towards normalisation is better for economy to adjust to pre-crisis growth level,” the RBI Governor said.
While the Finance Minister said the government borrowing programmes would not be disturbed by RBI measures, the central bank admitted that the mop up by the Centre would be a challenge.
“Managing the borrowings of the Government during 2010-11 will be a bigger challenge than last year,” Subbarao said.
Government has projected to borrow Rs 4.57 lakh crore this fiscal, slightly up from Rs 4.51 lakh crore last fiscal.
Global financial meltdown was at the back of RBI when it announced to come out with norms for salaries of top executives of banks by June-end, as agreed by the leaders of G-20.
The Reserve Bank also said it would review the liberalisation policy for foreign banks by September, put on hold in 2009 after the global financial mess.
