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 the borrowing rate shall now on be pegged 100 basis points below it in a major policy decision Tuesday.
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.
RBI Governor D. Subbarao, who unveiled the monetary policy for this fiscal, before the chief executives of commercial banks at the headquarter’s 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.
‘It was considered necessary to contain inflation and in the context of volatility of commodity prices including crude in the international market,’ said Mukherjee, minutes after the central bank governor concluded his speech in Mumbai.
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
