RBI has taken a fresh step in its fight against inflation. As was widely expected, it increased its key policy rate on Tuesday. Its main lending rate, the repo, is up 25 basis points to 8.5%. And that means the reverse repo automatically goes up by 25 basis points as well to 7.5%. The reverse repo is the rate at which banks deposit their surplus with RBI.
Tuesday’s rate hike was the 13th since March of 2010. But RBI has also indicated it’s unlikely to increase the repo in December if inflation follows an expected trajectory. On the downside, RBI cut is growth forecast for the fiscal year-end to from 8% to 7.6%. But its inflation forecast for March 2012 remains the same at 7%.
The Reserve Bank also announced landmark change in banking rules on Tuesday. It has finally deregulated the savings bank deposit rates. The current fixed rate for savings deposits is 4%. Tuesday’s move opens up the last of India’s regulated rates to market forces. The immediate gainers are likely to be banks with smaller bases of savings accounts. They’ll now be able to increase their savings rates to attract more customers.
Indian markets surged on Tuesday after the Reserve Bank indicated its monetary tightening could finally be at an end. The Sensex rocketed up 316 points to 17,255. And the Nifty closed 93 points at 5192.