Slash inflation even if growth slows down in the short term. That seems to be the message from the Reserve Bank’s first policy review this fiscal. Taking a hawkish stance, RBI increased its key policy rates by a full 50 basis points. The repo, which is the rate at which it lends to banks, is now at 7.25%. And the reverse repo, the rate at which it absorbs excess liquidity is at 6.25%. The Reserve Bank hiked its rates eight times in the last fiscal. Its latest hike is likely to increase interest rates for home and auto loans.
Talking about the rate hikes, RBI governor D. Subbarao said the repo would now be the main policy rate. From now, the reverse repo will always be kept a hundred basis points below the repo.
Subbarao also reset the Reserve Bank’s targets for India’s economy. Projected inflation for the fiscal ending in March 2012 is now 6% with an upward bias. And the economy is expected to grow a mere 8% during the period.
In another significant move, RBI has jacked up the savings account deposit rate. It’s also up 50 basis points to 4%. The increase is likely to be popular with bank customers because their savings rates will go up. But banks could see their margins come under pressure.
But the Reserve Bank wasn’t done. It also accepted a key recommendation of the Maelgam committee on microfinance. The maximum interest rate MFIs can charge is now 26%. And they can only lend to people who earn Rs60,000 or less a year.
In other news, it’s now all up to the striking Air India pilots. On Tuesday the Delhi high court served contempt of court notice to nine of the pilots. That’s because they didn’t heed an earlier restraining order that told them to end their strike. The nine men in question lead a group of some 800 Air India pilots who have been on strike for a week.
Of course, the bears turned out in force on Tuesday after the Reserve Bank’s bigger than expected rate hikes. The Sensex plunged 463 points to 18,535. And the Nifty lost 136 to finish at 5,565.