Months of speculation finally came to an end Tuesday. The RBI released its policy statement announcing an increase in both policy rates and the cash reserve ratio. They’re all up 25 basis points. The repo rate, the rate at which the RBI lends to banks, now stands at 5.25%. And the reverse repo rate, which is the rate at which banks lend excess cash to the RBI, has been hiked to 3.75%.
Also up on Tuesday is the cash reserve ratio or CRR. It’s now at 6%. CRR is the portion of deposits a bank needs to keep with the RBI. The spike in the CRR is expected to take some Rs12,500 crore in excess cash out of the system.
RBI governor D. Subbarao defended the rate hikes. He said that with the Indian economy recovering, the priority was now dealing with inflationary pressures. India’s wholesale inflation hit a 17-month high of 9.9% in March. The RBI expects it to fall to 5.5% by the end of the fiscal.
The government has frozen its plans to sell some of its stake in telecom company BSNL. Its decision came after the firm’s three hundred thousand employees went on strike to protest the plan. A government-appointed company had recommended selling a 30% stake in BSNL through an IPO and retrenching a hundred thousand employees.