RBI ups rates to check prices

MUMBAI, JULY 27
The Reserve Bank today raised its key interest rates by up to 0.5 per cent to check double digit inflation and predicted dearer interest regime, but banks said they would wait for now.
Most banks, including market leader SBI and ICICI Bank, said though RBI steps had put pressure, they would not raise interest rates immediately. As a result, commercial, auto and home loan rates would not change soon, contrary to industry’s apprehensions.
RBI in its quarterly review of the policy increased the short-term lending rate (repo) by 0.25 per cent to 5.75 per cent and short-term borrowing rate (reverse repo) by 0.50 per cent to 4.50 per cent though it kept cash reserve ratio (CRR), the portion of funds that banks keep with central bank, and bank (long-term) rate unchanged.
RBI had earlier on July 2 hiked repo and reverse repo rates by 25 basis points and today’s hike was the fifth since January to combat inflation which is in double digits for the fifth month now.
Finance Minister Pranab Mukherjee hoped that steps taken by the RBI will check inflation without hurting growth.
RBI Governor D Subbarao, however, said, “We expect credit to be dearer…As credit demand picks up, we expect lending and deposit rates to go up.”
“No immediate impact on the interest rate. In Q2, interest rate won’t go up by and large,” SBI Chairman O P Bhatt said, adding that the bank in the coming days would review the build-up of “upward bias”.
Acknowledging that excess liquidity has disappeared from the system, ICICI Bank CEO and Managing Director Chanda Kochhar said the interest rate depends not only on policy measures but also on the liquidity situation. “We are already witnessing a rise in interest rate for wholesale deposits,” she added.
As a result, share prices of most banks staged a recovery from the pre-policy selling pressures. BSE banking index, which was 0.08 per cent down prior to RBI measures, improved by 0.7 per cent.
Confident of moderating price line, RBI said inflation by March 2011 would decline to 6 per cent, though it would be slightly higher than earlier projection of 5.5 per cent. On the other hand, economy would grow by 8.5 per cent, RBI said revising its earlier projection of 8.2 per cent for 2010-11.
“I expect this policy will lead to further easing of inflation which already is going down. It should also keep us fully on track in terms of growth. The monetary policy …is another calibrated step in the right direction,” Mukherjee said while talking to reporters in Delhi.
Industry chambers, however, sounded worried over the monetary policy move, saying it would step up interest rates and encourage banks to park funds with the RBI as they would get 0.5 per cent more, as the reverse repo rate has been hiked.
Describing the RBI’s policy measures “a bit worrisome”, FICCI president Rajan Mittal said, “the reverse repo (rate) increase will incentivise parking of funds by banks with RBI…reducing lending opportunities to industry…there is always underlying fear of the rate hike eventually leading to increase in lending rate.”
Assocham President Swati Piramal expressed fear that “the lending rates may move north by 25 to 50 basis points making bank borrowings a little dearer…”
Allaying the apprehensions of the industry, Finance Secretary Ashok Chawla described the RBI move as the “right approach” saying, “the overall growth parameter will not be affected…credit growth which they have projected at 20 per cent will also continue to provide stimulus to corporates and normal industrial activities.”
“Given both the trends in liquidity and prices, it was expected that RBI would tighten policy. I don’t think it will have any adverse effect on the real economy,” opined Planning Commission Deputy Chairman Montek Singh Ahluwalia.
Justifying hiking the key rates, RBI said, “Inflationary pressures have exacerbated and become generalised with demand side pressures clearly visible given spread and persistence of inflation, demand-side inflationary pressures must be contained.”
RBI’s projection of a higher inflation than the earlier estimate could partly be attributed to the fuel price hike effected late June. The Central Bank said there can be an up to 1 percentage point impact on WPI-inflation owing to the fuel price hike.
On June 25, the Centre had raised petrol prices by Rs 3.5 a litre while decontrolling it and hiked diesel prices by Rs 2 a litre, LPG by Rs 35 a cylinder and kerosene by 3 a litre.
The apex bank also said it would undertake mid-quarter policy reviews, on the lines of major central banks abroad, “to take the surprise element out of the off-cycle actions.”
The first such review will be on September 16.
Uncertainty over global recovery, it added, could have possible adverse consequences for the country. If the global recovery slows down, it will affect all emerging market economies, including ours, through usual exports, financing and confidence channels, the RBI said.
It further added that a global slowdown also carries the significant risk of a potential slowdown in capital inflows, it said, adding that it may act as constraint to domestic investment.