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RBI hikes policy rate 50 bps to tame inflation, savings rate up

RBI hikes policy rate 50 bps to tame inflation, savings rate up
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First Published: Tue, May 03 2011. 12 29 PM IST
Updated: Tue, May 03 2011. 12 29 PM IST
Mumbai: The Reserve Bank of India (RBI) on Tuesday increased its key lending and borrowing rates by half percentage points each, intensifying its battle against the high inflation, which is acting as a dampener to the high growth in world’s second fastest growing economy.
This is the ninth time since March, 2010, the RBI is hiking the key rates as part of its efforts to cool down high inflation.
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The 50 basis point hike each in central bank’s overnight lending rate to banks, repo rate, and borrowing rate, reverse repo, to 7.25% and 6.25%, respectively, was predicted by Mint on Monday, a day ahead of the policy announcement.
One basis point is one hundredth of a percentage point.
In another major development, the central bank has also hiked its savings account deposit rates by 50 bps from 3.5% to 4%. This will help the common man as the returns on their savings will go up but could result in a rise in bank’s cost of funds.
“The RBI action was intended at curbing the inflation even at the cost of growth. This is expected the put a check to the high inflation,” Ajay Parmar, head research, institutional equity with Emkay Global Financial Services Ltd, said
Announcing the policy measures, RBI governor D. Subbarao said that the repo will be the single operative policy rate henceforth and the central bank will keep the reverse repo 100 bps below the repo rate.
The RBI will also constitute a new Marginal Standing Facility (MSF), from where banks can borrow overnight up to one per cent of their respective net demand and time liabilities or NDTL, Subbarao said.
The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.
Noting that the FY12 policy is “set in different conditions”, pegged the inflation target to 6% with an upward bias for the fiscal year ending March, 2012. However, the inflation is likely to remain at near 9% till September, he said.
The central bank pegged the growth at around 8% for the fiscal.
With this, since March, 2010, the Indian apex bank has hiked is repo rate by 250 bps to 7.25% and reverse repo rate by 300 bps from to 6.25%.
“The resurgence of inflation in the last quarter of last year became a matter of concern. Although the trigger for this was the sharp uptrend in international commodity prices, the fact that these have quickly passed through into the entire range of domestic manufactured goods indicates that pricing power is significant,” Subbarao said announcing the policy measures on Tuesday.
The inflation, measured by the wholesale prices, has stayed above the Reserve Bank’s comfort zone for most part of the year. It rose to 8.98% in March. Despite the successive rate hikes, the RBI has so far been not successful to hold back the high prices.
Last fiscal the RBI had missed its targets set for inflation. It began the fiscal 2010-11 with a forecast of 5.5% but had to later revise the target to 7% in December, 2010 and 8% in March, 2011.
Reacting to the central bank’s rate action, India’s benchmark Sensex was trading 60 points down at 18950 points while the yield on the10-year bond was 8.1589% before policy, rose to 8.1634%.
Bankings sector index was down 20 points at 12784.
The hike in RBI’s key rates could lead to an increase in banking lending rates making all floating rate loans dearer to the customer.
The chiefs of at least four chairmen of public sector banks Mint spoke to early this month said that they will consider revising their lending rate structure once the central bank hikes its rates.
The central bank also capped the interest rate microfinance institutions or MFIs can charge customers at 26% and the annual income for the MFI borrower at Rs60,000.
Those MFIs, which do not comply with this rule cannot avail the priority sector status, the governor said.
RBI will set up a committee to examine the priority sector rules, the governor said.
MFIs, which are in the business of giving small loans to poor, are facing a crisis since mid-October when the Andhra Pradesh government came with a law to regulate such firms.
dinesh .n@livemint.com
Joel Rebello contributed to this story
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First Published: Tue, May 03 2011. 12 29 PM IST