RBI hikes repo, reverse repo rate by 25 bps


Prime VIP
Mumbai, July 2

The Reserve Bank today raised key short-term policy rates by 25 basis points, in an unscheduled announcement, to tame double-digit inflation, but bankers said this wouldn't lead to any hike in interest rates for now.

The increase in rates comes ahead of the July 27 policy review by the apex bank, which feels that money supply in the system has started easing in contrast to the crunch felt just a fortnight ago when corporate demand for funds shot up.

RBI's decision to increase the short-term rates at which it lends (repo) and borrows (reverse repo) money from commercial banks, however, may not have any immediate impact on the interest rates which home and car loan seekers and corporate borrowers pay, say bankers.

Hike in repo and reverse repo by 25 basis points to 5.50 per cent and 4 per cent, respectively, "should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process", said the RBI.

Wholesale prices-based inflation crossed double digits (10.16 per cent provisionally) in May, but as per final figures the rate of price rise has been 11 per cent or more since February. Food inflation eased to 12.92 per cent in the third week of June from above 16 per cent.

Justifying its mid-course action, the RBI said, "The developments on the inflation front, however, raise several concerns...Food price inflation and consumer price inflation remain at elevated levels. There has been some moderation in food price inflation, but the price index of food articles continues to increase".

RBI had earlier increased the repo and reverse-repo rates by 25 basis points in April.

On the impact of hike in key rates on interest rates, SBI chairman OP Bhatt said, "RBI's move may not impact interest rate till July 27...RBI's move will not impact base rate of SBI." The bank would think of some decision only after the monetary policy review on July 27, said the chief of SBI, which this week pegged the base rate, the minimum lending rate, at 7.5 per cent.

RBI's action, said ICICI Bank CEO and MD Chanda Kochhar, "is consistent with its gradual normalisation of policy rates towards a level consistent with the economic growth, in a non-disruptive manner." Although the monetary tightening steps are being announced at a time when the banks are complaining of liquidity crunch arising from payment of more than Rs 1 lakh crore towards 3G licence fee and advance taxes, the RBI said the liquidity situation has started improving.

Besides, the RBI has extended the additional liquidity facility, through which it infuses liquidity in the banking system, till July 16. The facility was to end today. — PTI